IF YOU'RE LOOKING FOR HUGH'S BOOKS PLEASE GO HERE AND CHOOSE 'Author'.
Sorry about the diversion due to British national elections on 7 May.

Green Party policy at a glance

Click on the policy to see my thoughts on how it will apply to this constituency.

Policy G C L L U
1 Local government funded by property tax          
2 Local government funded by sales tax ?        
3 Support for NHS Reinstatement Bill   ?   ? ? ?
4 Bring railways back into public ownership          
5 Open national electricity grid          
6 No more nuclear power stations          
7 ‘Austerity’, cuts to public services          
8 EU referendum          
9 Scrap Trident and other nuclear deterrent          ?
10 High Speed Rail 2          
11 Mansion tax          
12 Wealth tax          
13 Rent controls          
14 Minimum wage must be a living wage      ?
 Date: 25 January 2015          

1. Local democracy funded by annual tax on property value

In my opinion: The Green Party proposes to use the world-standard system of funding democratic local government. In nearly all developed countries, municipalities set property taxes based on a proportion of the annually recalculated value of each property. The idea is that the municipality uses the tax to improve the quality of life in some localities; land values rise as a result, benefiting property owners and generating more tax. A virtuous circle is thus created. One way in which the municipality can improve the quality of life for everyone is to subsidise social housing in the local area for the lower-paid workers who provide local services used by everyone rich or poor. High property values in the best neighbourhoods can therefore increase access to affordable housing rather than diminishing it.

Britain used this system up until the 1990s, (‘domestic rates'; Northern Ireland still uses the system and Scotland is thinking of restoring it). The Conservative government abandoned it to curb an outbreak of extreme left-wing municipal councils which were refusing to increase property taxes (rates) to fund their services. Central government’s solution was to impose a scale of property values and to specify a relatively low level of property tax depending on a property’s position on the scale. Only around 20% of local services are funded by this local ‘Council Tax’ which is related to valuations which are now long-out-of-date. The rest of the money for local services is provided by central government out of national tax revenue, and local authorities are not able to ask local people to decide how much tax to pay and how it should be spent, as they commonly do in the US and elsewhere. Over the years land values in different areas of the UK and different parts of the same area have steadily diverged so that in the best places landowners pay trivial property taxes while in run-down areas the tax is proportionally much higher.

How to bring back annual property tax. It can’t be emphasised enough that this is not an additional tax but a replacement for other taxes. Most obvious questions can be answered by seeing how other countries do it, but we do have a unique challenge in Britain because of the 25-year break when people paid their share of tax in other ways. It is not proper or practical to tax people on all the increase in property values during that period. A common percentage of tax in US urban areas is 1 per cent of property value; if this were applied to the average property in Westminster the tax would be nearly £10,000 p.a. instead of the current maximum of £1,350. On the average property in depressed Sunderland the tax would be about £860 where it is now almost equal to Westminster’s £1350. Obviously the Green Party proposes a relatively long migration period to adapt to the new system, gradually increasing property tax while reducing income and other taxes. One way might be to tax only the increase in property value after the annual tax was restored. The proposal does not require a huge software investment: there is a well-tried IT capability in every local authority which at present processes a very small amount of tax from each household, so the technology is in place to hit the ground running. It is also possible to reform tax along these lines in a particular local authority without waiting for a national change, which favours Green Party candidates for local office.

Bad effects of not using annual property tax. The small amount of tax raised locally under the present Council Tax system obliges central government to impose other taxes which are high and harder to collect than value-based annual property tax. They also distort economic behaviour. A high property transfer tax discourages labour mobility. The complexity of income and corporation taxes, designed to extract tribute from every nook and cranny of the working economy, employs thousands  of private sector personnel in processing the paperwork involved. To save money during the recession the government dismissed 45,000 public sector tax collection workers and a huge ‘tax gap’ has opened up between what should be collected but isn’t, running to £30-40bn a year. The overall tax burden in the UK is still way above that of the US, even now that much of our once-prized social state has been dismantled. Transport links and other services in the sparsely-populated USA do not come cheap on a per-capita basis compared to the compact UK and there is reason to believe that our tax burden could be reduced by a quarter. The excess tax we pay is the price of abandoning the easiest-to-collect tax in the world so as to give absolute power to central government and avoid a Trotskyist takeover of Liverpool. The Green Party can argue that this threat has now passed.

The main losers from the restoration of normal property tax would be 1) land speculators who pay no tax at all on unused land and can therefore profit from the boom-and-bust cycle of land prices in the UK caused by central government’s attempts to provoke house-building booms before each election, and 2) foreign oligarchs who have bought monstrously expensive property in Central London and do not pay UK income tax which would have made up for the absence of property tax.

The demographics of Central London make it a suitable place to start reforming Council Tax in this way. It would stabilise prices because property would no longer be so attractive to absentee foreign oligarchs. It would ensure that empty properties are brought into use. Some of the ‘location value’ of Westminster property will not arise from schemes funded by the local tax, so other levels of government are entitled to take a share for redistribution.

Other political parties are coming round to the idea. Many activists in the ‘main’ parties have been persuaded by the Green Party’s arguments (documented in a study by expert Andy Wightman commissioned out of our funds) and have tried to make their leaders commit to restoring sensible property tax but it is hard to convince the leaders, who now have almost absolute power, to give back some of it to local authorities. With no independently elected second chamber, and with local authorities reduced to ‘branch offices of Whitehall’ as Michael Heseltine put it in his No Stone Unturned report to the Chancellor in 2012, no other national government enjoys as much spending power. All of the power and none of the knowledge; an  ideal basis for launching what Tony Blair called ‘eye-catching initiatives’ like HS2.

[back to policy table]

2. Local democracy funded by local sales tax

From the table it can be seen that UKIP is the only other national party to propose local tax-setting power. It has proposed a local sales tax rather than the world-standard annual property tax. This parallels the calls from Tea Party activists in the US for abolition of annual property taxes and use of local sales tax instead. There’s something satisfying in the idea that a person could actually own the land free of tax in perpetuity, unlike in the real world USA where, believe it or not, if you don’t pay your property taxes for five years the State auctions your land off to pay your back taxes and gives you the change.

[back to policy table]

3. Supporting the NHS Reinstatement Bill

The Green Party is the only national party committed to the National Health Service (NHS) Reinstatement Bill. This Bill has been drafted and proposed by a wide range of groups with the principal aim of reversing the provisions of the 2012 Health and Social Care Act which abolished the government’s duty to provide publicly-funded health care in England. Two Labour MPs have endorsed the Bill, and another Labour MP, Clive Efford, has introduced a Private Member’s Bill which attempts to achieve much of the same thing.

In my opinion: Publicly-funded health care which delivers one standard of care to both rich and poor has one great strength overlooked by financiers: staff psychology. Communal and egalitarian care of other humans is a key trait in our genetic inheritance; it works by giving pleasure to the carer, and this is being confirmed more and more strongly by research in anthropology and behavioural ecology. Of course, like other traits it can be modified by circumstances. This is why Hinchingbrooke NHS Trust achieved the regrettable distinction of being the only NHS establishment found by the Care Quality Commission to be deficient in caring for patients. Labour and Conservative governments had privatised Hinchinbroooke. The recent abandonment of the hospital by its private operator is the end of the road for the policy.

Staff motivation is not enough, and there is no question that the NHS needs to be informed by more private sector expertise. On a visit to one NHS Trust hospital it seemed to me that the maternity unit was a production line which ignored the obvious needs of a baby factory. Normally it was kept running by the Herculean efforts of the midwife, up to her shoulders in blood and juggling babies and sutures with speed and skill. Now she was idle; induced mothers in labour were being put in ambulances where paramedics would deliver their babies on the way to another hospital, because there was no room in the recovery ward. Nobody had the authority to call the pediatrician in the middle of the night to get them to come in and sign out the recovered mothers and babies.

The solution to the lack of cross-fertilisation from the private sector is not private equity. It is to appoint active, accountable non-executive directors with years of experience in industry, with community spirit and no conflicting interest in hospital services. Let them walk the floors and feast on the improvements they can introduce with the tact and political skill that only comes from years of results-oriented work in industry. Instead of this, in the current fad for financial manipulation, the non-medical skill usually requested of non-exec candidates is finance. Move over, bean counters. You’ve given it your best shot.

[back to policy table]

 4. Bring railways back into public ownership

In 2002 the privately-owned track company Railtrack was returned to public ownership as Network Rail. The Green Party is calling for the renationalisation of the train operating companies as well.

In my opinion: Privatisation of the railways, after a long sequence of other privatisations was widely seen as a privatisation too far and has been partially reversed. I was involved in the first of the series, the privatisation of British Telecom which was considered risky at the time but which I think is now accepted to have been the most successful of all. Perhaps this is why the simple formula of privatisation caught the imagination of politicians. The reason it worked in telecoms is that there turned out to be a massive suppressed demand for communications, and new technologies such as mobile and internet were on the cusp of development. Innovation on that scale would not have been possible under public ownership, not just because of financial constraints but cultural ones as well. Competition, introduced properly ten years later in the 1990s, caused a radical restructuring of the industry with former dominant IT firms like IBM and BT being overshadowed by new entrants. None of this has happened in subsequent privatisations, such as rail. All the innovations subsequently introduced by private rail companies were well within the core competencies of the old British Railways: there has been evolution, not revolution. Unless competition changes beyond recognition the industry structure inherited from the previous dominant operators, it does not really achieve anything. It has great costs too: in the railways competition has led to fragmentation which impedes coherent planning. The project for a new High Speed Rail route (HS2) is an example of this fragmentation. It will compete against the existing network for funding.

Surprisingly perhaps there is another privatised industry in the UK which is about to go through the same rebirth as telecommunications did two decades ago. That is the energy industry, which will open up to nontraditional competition under the impact of new network technology: the open grid.

[back to policy table]

Making the UK energy industry as competitive as telecoms

The Competition and Markets authority (CMA) is investigating why competition is not working in the UK energy market. The investigation should report by the end of 2015, and meanwhile the CMA is publishing submissions from individuals and organisations on the CMA website.

My submission argues that the regulator is mistaken in believing that if customers regularly ‘switch’ between the ‘big six’ energy suppliers it indicates that there is a competitive market. Real competition means disruption of any traditional industry structure derived from the former monopolies. This disruption will happen in the UK because of the rise of micro-generation at the point of use, for example household solar. The CMA’s Issues Statement overlooks this very healthy trend and only asks how to preserve the old industry structure.

My own experience is with the very successful restructuring of the UK telecom industry in the 1990s. The telecoms market became highly competitive and an example for the world after controversial new regulation in the 1990s forced incumbent British Telecom to invest in opening its network to new entrants and modes of communication. A similar change could transform the energy market now, and I show that the UK has unique strengths to be a world leader in competitive energy provision. My submission shows how BT management vehemently resisted the new regulation even though that regulation quickly enriched their shareholders. A similar re-regulation will make the energy industry a market for communication of energy instead of purely for distribution of centrally-generated energy.

My paper is available on the CMA website: see Hugh Small CMA submission.

 

Bank of England discovers False GDP

WEDNESDAY, SEPTEMBER 10, 2014 – 11:01

This ‘official discovery’ (you heard it on this blog first in early 2013) comes too late to make austerity unnecessary, but just in time to improve the feelgood factor for the Scotland referendum. “This isn’t based on any private information” says Weale. No, just on ONS data that wasn’t supposed to be released until after the Scotland vote.

BOE Weale: GDP Changes Hint Productivity Not Bad As Thought

LONDON (MNI) – Bank of England Monetary Policy Committee member Martin Weale said Wednesday that changes to the way UK GDP data are calculated will show that the country’s recent productivity performance has not been as weak as thought.

Policymakers are troubled by the UK’s exceptionally weak productivity rates. Official data released in February showed output per hour in the UK was 21 percentage points below the G7 average. But recent changes to how GDP is calculated show the economy was 4% larger in 2012 than thought.

Weale says these new data, due for release on September 30, will likely show productivity growth was better than has been reported.

“I think it is likely that they will show, and this isn’t based on any private information, that the productivity story has still been bad but not quite as bad as we had thought,” he told the House of Commons Treasury Select Committee.

–MNI London Bureau

EU equalisation will rescue freedom of movement

Economic migration is not an inevitable consequence of freedom of movement, and does not support the fundamental rationale of the EU.

Freedom of movement within the European Union was one of the basic rights enshrined in the original Treaty of Rome which came into effect in six countries in 1957. It is now controversial, and the UK Independence Party cites it as a principal justification for leaving the Union.

To encourage rational debate it is worth looking at what the founding states had in mind. In 1960 the poorest of them (Italy) had three-quarters of the GDP per capita of the richest (West Germany, if one excludes Luxembourg). It is unlikely that the founders intended to solve Europe’s economic problems by encouraging the population of the poorer states to move to the richest ones in large numbers. Neither did the differential provoke such large-scale economic migration.

Now, nearly ten per cent (40-odd million) of the EU population live in countries with about half the average GDP per capita or less of those founding states. Whether this differential is enough to provoke large-scale economic migration is uncertain, but it is apparently enough to provoke fear of it.

Why do Londoners not fear mass economic migration from Sunderland (always the butt of this kind of comparison)? Surely it’s because the basic entitlements (health, education, etc) there for the underemployed are similar to (or better than) in London, and breaking family and friendship ties in search of greater prosperity is not everyone’s choice

Equalisation of basic entitlements is a goal which the EU should adopt in the interests of social peace in our neighbourhood and to avoid counterproductive migration. Equalisation will require higher transfers of wealth, and this is what the debate should be about. Nationalist politicians resist this, particularly in the UK, because they argue that their nation’s relative prosperity is due to the superiority of their doctrine rather than to accidents of history and geography. But the gaps are not unbridgeable. The UK is just 7% ahead of the EU’s current average per capita GDP.

Chris Pissarides and the deficit

I wonder how many businessmen are puzzled by the politicians’ desire to eliminate the ‘deficit’ and to ‘deleverage’. If the economy were a business this would not be an obvious strategy. But can you compare the economy to a business, as the Mature Economy Cookbook does?

One academic economist who seems to believe that national economic strategists can learn something from business is Sir Christopher Pissarides, the Nobel Prizewinning member of the faculty of the London School of Economics. I recommend his open letter to the Chancellor criticising the Autumn Statement of 2012, and especially his budget preview of 2013. Prof. Pissarides has expressed concern that ‘the deficit is reported as the difference between current revenue and spending, and not as the difference between the present discounted value of earnings and current investment spending, as is done by private companies’.

Many business leaders would share his concern. Apart from anything else, the abandonment of investment calculation implies that if the deficit turns into a surplus politicians can spend it on something glamorous without calculating the return.

Addendum: Even if one admits that private sector investment has recently been better at producing a return than public sector investment, it does not automatically follow that any investment that cannot be made by the private sector should not be made at all. And it is not a law of nature anyway. Public sector investment in the days of Joe Chamberlain or the Tennessee Valley Authority was extremely successful. The failure of public sector investments in Britain recently are more down to the incompetence of our over-centralised government, whose ignorance is starkly documented by Tory grandee Lord Hesletine in No Stone Unturned.

More energy regulation = more competition

According to The Guardian, the government has paid energy companies £1bn in advance for insulating homes but they have not done it:

http://www.theguardian.com/environment/2013/nov/15/energy-firms-green-measures-big-six

Some cynics might claim that energy companies are dragging their feet because they have a conflict of interest: insulating the UK’s homes would reduce company revenues. But you should never attribute to dishonesty what can be explained by incompetence. As a management consultant with experience of regulating mature industries I can assure you that energy companies simply do not have (and should not have) in-house skills in the innovative competitive marketing needed to sell insulation as a consumer service, even if they subcontract it. Energy companies are oligopolistic low-competition suppliers of a basic commodity and are regulated to prohibit them from diversifying into other areas which necessarily involve business risk. The government has paradoxically given them a monopoly of a £1bn insulation subsidy only because it believes it  can combine the two goals of reducing energy consumption and compensating the energy companies for the resulting loss of revenue. This won’t work. Energy companies work best when they ‘stick to their knitting’ of providing energy at lowest cost.

Environmentalists should campaign hard for the £1bn insulation subsidy to be paid to start-ups or other companies who can bring innovative marketing techniques and risk capital to this highly competitive market. To avoid dominating this new market, energy companies should be prohibited from selling insulation services just as they are prohibited from gambling in and dominating other competitive markets. These ‘Line-of-business restrictions’ are essential to promote both competition and process improvement in the dominant operators.

World Bank: Reducing emissions could add 2.2% to GDP

The World Bank is reminding us that GDP is a measure of ‘financial value added’ and that when you reduce ‘intermediate consumption’ (e.g. of raw materials) GDP goes up even if consumer sales stay flat. This possibility is not often mentioned in political discourse. Chapter 4 of Giving Away the Planet explains it. The World Bank’s proposal would require public investment which, even when profitable, goes against the prevailing policy of reducing the ‘deficit’.

read the World Bank news here

False GDP statistics slow growth, waste resources

Political leaders in the developed world want economic growth but instead they are maximising ‘False GDP’, increasing resource consumption rather than increasing national financial prosperity. This problem is independent of the fact that GDP does not measure the wellbeing of a country’s population. GDP was only ever meant to perform the important role of estimating a nation’s financial prosperity. Financial prosperity is not sufficient for wellbeing, and in well-documented cases throughout history has even  reduced wellbeing, including life expectancy. (Yes, I’m writing a book about it, see below).

Failure to detect the flaws in official GDP figures is consistent with the observations of Professor John Kay of the London School of Economics confirming that few economists understand GDP any more. See his remarks here and here).

‘False GDP’ misleads policymakers because of the relatively new practice of judging ‘growth’ on recent official quarterly estimates of GDP. This means that fixed asset investment looms large as a component of this ‘False GDP’ before it has fulfilled its purpose of creating prosperity in future years. Unfortunately the fastest-growing and most profitable fixed asset investments are not included because they are too hard to measure or estimate. This causes policymakers to divert capital investment to easily-measurable but less profitable capital assets such as new production capacity for export, high speed rail, and hub airports. These are inferior to the ‘intangible fixed assets’ which are the investments of choice for major enterprises and which employ more and more labour in developed economies. When the capital investments start to generate (or destroy) value added in later years the national accounts will reflect it and the bias in their initial inclusion no longer distorts the figures – but by that time democratic governments have stood or fallen on the basis of short-duration False GDP measures and the economy has been harmed by unprofitable capital investment and missed opportunities.

The solution is to use other non-audited indicators for managing the economy and for quickly judging results. As long ago as the 1990s private sector industry stopped using cumbersome ‘financial accounting’ indicators such as accounts receivable to manage a business and developed ‘management accounting’ indicators instead.

To clarify the nature of economic growth and prosperity, Hugh Small’s forthcoming Giving Away the Planet goes back to the Stone Age origins of the economy, informed by the last few years’ startling discoveries about human evolution. This is a topic neglected by many economic historians who (disagreeing with both Adam Smith and Karl Marx) believe that innovation and the free market only began with the agricultural and industrial revolutions of the 16th and 17th centuries.

Why did Putin annex Crimea?

Events have proved me wrong: I predicted in my earlier post Storm in the Crimean Teacup that President Putin would not want to annex any part of the modern Ukraine. Now he has agreed to annex Crimea. Why? And why was Crimea so quick to give up the chance of complete independence?

If the Crimea only wanted to hide behind Russia’s skirts to avoid being bullied by the Ukraine, this could turn out to be a replay of many earlier incidents in Russia’s expansion and subsequent troubles. Tolstoy’s Hadji Murat describes how tribes on Russia’s borders would enlist Russia’s help in freeing themselves from oppression by other tribes, only to find that their helpers were even harder to get rid of than their previous oppressors. Thus by a process of military osmosis Tsarist Russia became what Lenin is said to have called ‘the prison house of nations’.

Crimea’s history and my single visit in 2006 persuaded me that it would make a viable nation state. It has  almost exactly the size and population of Macedonia, which is applying for EU membership, and more valuable assets. But Ukraine’s constitution bars any part of Ukraine from seceding unless the whole of Ukraine agrees in a referendum. This constitution seems anomalous given the worldwide trend to local self-determination (British people as a whole, for example, have no say in the Scottish independence referendum and neither do Europeans have the right to stop Britain withdrawing from the EU). But Ukraine’s odd right to ban unilateral secession seems to have been guaranteed in perpetuity by the US and the UK in the Budapest Memorandum. All sides in the dispute argue that their opponents have acted in defiance of international law (which might hold the Ukraine constitution to be illegal) but there is no news on any court taking jurisdiction on the matter as is normal in legal disputes.

The legal arguments seem finely balanced, given that it is common ground that a clear majority of Crimeans would rather be part of Russia than part of the Ukraine. It is a shame that their referendum did not offer the alternative of independence guaranteed by Russia. It is not clear to me whether countries which voluntarily join the Russian Federation have any more right than Ukrainian subjects to secede. If they do not, both Russia and Crimea may come to regret the latter’s voluntary incarceration in a new prison house of nations.

See my summary of the Crimean War of 1854/6, temporarily on open access at History Today for April 2014

Mansion tax grab from Westminster Council

Reforming the City of Westminster’s council tax – which is currently only two-thirds that of of equally posh neighbouring borough Kensington and half that of up-and-coming Camden – is a no-brainer for reasons described in the other posts on Land Value Tax. Westminster’s councillors have shown no appetite to do so, but now the unexploited tax opportunity has been spotted by national political parties too, with Labour’s leader saying that they will impose an annual ‘mansion tax’ on houses worth over £2m. The Liberal Democrats have been flirting with the same idea for a long time. Around one in ten properties in Westminster would be affected, generating well over £100m a year for central government instead of for the City of Westminster. Can Westminster Council continue to leave this goal open now that national politicians have spotted it?

Before 2011 national government rules capped local government council tax increases at 2% in any year, and Westminster was trapped by its historic strategy of keeping council tax rates low and funding its roads out of parking charges instead. But now Westminster could easily impose a local ‘mansion tax’ under the new Localism Act, which allows an across-the-board increase in council tax to be made acceptable to voters in a local referendum by giving rebates to lower bands.  Fairer council taxes would make it harder for national politicians to claim that the rich are not paying their share. Even an increase of the top band of council tax to match Kensington – hardly enough to provoke a mass exodus of the wealthy – would generate £10m a year for Westminster. But instead, Westminster is continuing its strategy of improving the parking product. It is investing in parking bay sensors which will inform a smartphone app where and when a parking space is free and make the borough even more attractive to vehicle traffic.

Westminster’s devotion to its parking product is not only leaving money on the table from missed council tax opportunities – it is courting trouble in the shape of competition from Crossrail (three large new high-speed rail stations in Westminster making it more accessible by public transport) and from new public health studies that identify the health hazards from motor traffic in Westminster as worse than anywhere else.

—————————————–

Downloads: