Nicholas Kaldor on taxes and the illusion of incentives

Nicholas Kaldor was a post-Keynesian economist at Cambridge University and, during his final years in the 1980s, a devastating critic of the Thatcher government’s adherence to the doctrines of monetarism and ‘supply-side’ reform.

Here he is on tax cuts and incentives, taken from The Economic Consequences of Mrs Thatcher (1983), a collection of speeches made to the House of Lords (p. 9):

“Between 1880 and 1930, excluding the war years, hardly any new money was sunk into the coal industry or the iron and steel industry, and very little money – in comparison with Germany, not to speak of the United States – was put into the new technology industries which arose out of the invention of electricity, the motor car, heavy machinery, synthetic dye stuffs and other chemicals. Instead, vast sums were invested abroad. In some years during the Edwardian period, when home investment in manufacturing industry was almost zero, no less than 10 percent of our national income was invested abroad.

In those days there were incentives galore. However much Ministers may try to revive incentives through tax reductions, they can never hope to achieve the Victorian or Edwardian peaks in fiscal incentives, when income tax was not progressive and it was seven old pence in the pound or 3 percent instead of the present 33 percent. Yet with all those incentives, the economy was stagnating. If people think that we will now see miracles as a result of cutting income tax by, say, 3p or 6p in the pound, I can regretfully prophesy that it is more likely to make no difference whatever.

I have no doubt that without nationalisation we should have had the same situation after World War II as we had for 40 years before World War I and throughout a larger part of the inter-war years, and if one thinks that the period after World War II was bad, I can only say that in the opinion of all economic historians who have studied this matter seriously, the 20 years of the 1950s and 1960s showed more rapid economic progress and more rapid growth of productivity than any comparable 20 years in previous British history. That that was not just a reflection of a world trend is shown by the fact that while it was true of Britain, it was not true of Germany or the United States; in other words, their post-war record of productivity growth was no higher than had been achieved in previous periods. It was true in our case, and it is only in the last 10 years that our economic progress has broken down, for the reasons I mentioned (sic).”

Kaldor was not in favour of very high marginal rates of income tax, and instead favoured a progressive tax on consumption. However he was clear at the time that poor management was holding back British industry, and the problem, compared with our competitors, was ability rather than incentives.

Even today, the ‘burden’ of taxation in a number of European countries is higher than in Britain, and industrial performance has been notably more impressive. So other policies are more important, but successive Conservative and even Labour governments have failed to learn this.

All this remains relevant today, not least in the wake of the Trump tax cuts, and the turn to austerity in many countries in the wake of temporary fiscal stimulus following the 2008 crash. In Britain, cuts to public services were favoured over tax increases in the attempts to reduce the deficit. This surely reached its limit some time ago, with numerous crises across public services, from the health service to prisons.

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How “Shareholder Value” is Killing Innovation — Radical Political Economy

By William Lazonick, The prevailing stock market ideology enriches value extractors, not value creators. Conventional wisdom holds that the primary function of the stock market is to raise cash that companies use to invest in productive capabilities. The conventional wisdom is wrong. Academic research on corporate finance shows that, compared with other sources of funds, […]

via How “Shareholder Value” is Killing Innovation — Radical Political Economy

Stock buybacks and building a more equitable economy

This video tells the story of how a relatively equitable capitalist growth model in the 1950s and 60s gave way to rising inequality and weaker investment. For Professor William Lazonick, the economy of the US (and other advanced nations) currently generates “profits without prosperity”.

After World War II, average wages across the economy tended to increase in line with productivity, so that ordinary workers shared in rising economic efficiency over time. However, since the 1970s, the link has been broken as productivity continued to rise, while wages stagnated. This trend has been largely sustained to the present day.

The video discusses these changes in the US economy, and focuses on the phenomenon of stock buybacks, which shift firm resources away from productivity-raising investment in new technology and a more highly-skilled workforce towards short-term financial gains for CEOs and investors. Lazonick discusses possible solutions to these problems.

How austerity may reduce innovation

An interesting post from Simon Wren-Lewis on how sustained austerity can lower innovation and productivity growth. With the latter growing painfully slowly in the UK and other rich countries for a number of years, this is potentially important. As he notes, it may only explain part of the productivity slowdown, but it still highlights one of the negative impacts of austerity.

Put briefly, austerity weakens aggregate demand when it cannot be offset by monetary policy (as has been the case since the recession). This may create an ‘innovations gap’. Firms facing reduced demand for their products will slow down the rate at which they create or utilize new products, processes and technology via new investment, leading to weaker growth in productivity. This sort of investment would have ’embodied’ the new technology, but in its absence, the improvements will not take place.

Neo-liberalism and the productivity problem

Margaret_Thatcher_(1983)

Margaret Thatcher is irrevocably associated with neo-liberal politics

What has neo-liberalism got to do with productivity? Since the financial crisis many countries in both the rich and emerging world have experienced slowing productivity growth. Productivity growth is what makes rising living standards possible. It enables workers to earn more while working the same hours. Alternatively, it can enable them to earn the same wage while working fewer hours and taking more leisure. Government policy, trade unions and corporate governance can have a strong influence on such outcomes.

The UK economy has seen a particularly dramatic productivity slowdown since the crisis, from annual growth in output per hour of 2.2% between 1996 and 2006, to an average of 0.2% between 2006 and 2016. This is an astonishing turnaround. Continue reading

The media and the effects of a weaker currency: missing the point

Contando_Dinheiro_(8228640)What are the likely impacts on the UK economy from the weaker pound? A recent report from the British Chambers of Commerce (BCC) has warned of sluggish growth in the UK during 2017 and beyond. It blames uncertainty over Brexit, along with higher imported inflation and weaker consumer spending due to the sharp fall in the value of the pound since the June referendum on EU membership.

The BCC focuses on a squeeze on consumer spending in the months ahead. This is one effect of a weaker currency: higher prices of imported goods and services will tend to push up overall inflation, meaning consumers will be worse off in real terms if real wages do not rise. Put simply, the pound in our pockets will not go as far. Continue reading