Tag: Donald Trump

The US Republican company tax reform might be a good idea

I like to see the bright side. With the accession of Donald Trump as US President, alongside the Republicans controlling both houses of Congress, that is hard. Mostly, I simply hope that the process of challenge will make liberals stronger and harder. There is too much complacency in liberal thinking. And there is more cosying up to vested interests than we might like to think.

And among the flood of bad ideas coming out ot the new administration, there may be the odd good one. Reforming company tax might be one of them.

What I am thinking of are the plans proposed by Paul Ryan, the Speaker of the House of Representatives.  Liberals should support it, though alas many won’t because of who is proposing it, rather than its merits.  One part of the plan is to cut the rate of company tax to 20%, but reduce the number of deductions. This is an old debate. I am sympathetic to lower marginal rates and fewer deductions, though 20% is aggressive. I do not share the view that company profits should not be taxed, and that the burden of taxation should entirely be on distribution of profit instead.

There’s another old idea in the mix too: 100% write off of capital investments in the year the money is spent. Older British accountants like me will remember that we had that system here in the 1980s – called 100% capital allowances. It was the basis of many a tax avoidance scheme, and perhaps tilted the balance too much in favour of investing in plant rather than people. But there is some merit to it.

But the really interesting idea is the so-called “border adjustment”. This exempts from tax sales outside the US, and disallows as deductions spending on imports. This can be painted in different ways. To nativists this sounds like encouraging exports and discouraging imports. Alternatively it can be presented as a sort of value-added tax, which is well-established here in Europe. Neither presentation does it justice. It is not VAT, not least because the costs paying people is within its scope. And its effect on corporate incentives can be beneficial to the world economy rather than detrimental. It amounts to a constructive proposal to deal with a major problem: the taxation of transnational businesses.

At the moment companies are taxed by the location of profits, apportioned “fairly” using general accounting principles. This falls foul of manipulation through transfer pricing – what country-level subsidiaries within a transnational business charge each other. Thus when a multinational sells you something in Britain, it may treat as part of its costs the use of intellectual property based in a low tax regime, such as the Netherlands or Luxembourg. National tax authorities have been fighting a losing battle against abuse. The G20 recently adopted some new rules to reduce abuse, but this is sticking plaster to repair a fracture. It is best seen as an attempt by corporate lobbyists to stave off more radical approaches.

One such radical approach to reform corporate tax is unitary taxation. This method means that tax authorities assess a business’s global profit, and then allocate it to country based on the location of some combination of sales, employment or property. This is how US states tax the profits of US businesses, mostly allocating them using the Massachusetts formula. I have been advocating this for years internationally, but I have unable to persuade even the Liberal Democrats to pursue the idea.

Mr Ryan’s border adjustments are an alternative idea, and look simpler. In essence corporate taxes would be based on the location of revenues – something that would not be easy to distort. So, applied in the UK, Amazon or Starbucks would not be able to use spurious intellectual property charges to relocate profits to tax havens. Overall the scheme favours countries that have trade deficits (like the UK or US) rather than surpluses (like Germany or China), but that is no bad thing.

And probably unilateral action by the US is the only way much is going to happen. Multinational forums like the G20, and even the European Union, have completely failed to deal with this problem. Only the US has the power for unilateral implementation. Where it leads, others will be forced to follow. And post-Brexit Britain should be able to follow quickly.

Alas the power of corporate lobbyists in our democracies remains massive. They are masters of quietly undermining radical ideas and promoting “compromises” that have only superficial effects. Mr Trump is a sceptic, and that’s a very bad start. The hope must be that Mr Ryan will get his way in the inevitable horse-trading between the presidency and congress. Mr Trump may be sceptical, but he is not strongly against it either.

But even if this reform attempt fails, I hope that liberals everywhere will take on the challenge of corporate tax evasion with a radical approach, such as border adjustment or unitary tax. Alas I am not optimistic.

Why did the dollar rise with Trump but the pound fall with Brexit?

If you are part of the conventional liberal “elite” like me, 2016 has been marked by two colossal acts of democratic self-harm: Brexit and the election of Donald Trump. It is easy to understand why the pound sunk after Brexit. By why has the US dollar being doing so well after the election of Donald Trump as president? It is a useful lesson in macroeconomics.

The first thing to say, though, is that the way most of the media cover such market movements is unhelpful. They talk of sentiment and emotional judgements made by anthropomorphised “markets”. These may provide a satisfactory story line for a journalist, but they yield no real insight and no predictive power. They are simply projections onto past events. But very often, and this is no exception, far more satisfactory explanations are available, based on the way money flows through economies and financial markets.

Take Brexit. The obvious explanation is that markets (sticking with the anthropomorphism for now) take a dim view of Britain’s prospects amid the confusion and uncertainty thrown up by Brexit. But by itself that explanation is inadequate. The fall in Sterling was not matched by falls in stock markets (after an initial wobble) and other markets which also depend on future economic prospects. In fact there seems to be much more of a wait-and-see approach by the people and institutions who set market prices.

But wait-and-see is not so neutral. The UK runs a substantial current account deficit (5.7% of GDP according to the Economist, the highest of the 43 countries in its data table – and the second largest in money terms, at nearly $150bn in the last year). That means that the country is consuming much more than it is producing, which in turn means that the country is spending more pounds than it is getting back from exports, etc (or spending more foreign currency on imports than it is getting from exports). This deficit must be made up from the capital account – by investors buying UK assets of one sort or another (or Britons selling off foreign assets). Wait-and-see means that foreigners are more likely to defer making investments, which reduces the demand for Sterling on capital markets, causing its price to fall. This makes UK assets more attractive, UK exports more competitive and imports less attractive. All perfectly textbook.

So, what about the US? This country has a current account deficit too (2.6% of GDP which is $488bn in money terms, the largest current account balance in any direction by some margin, in the Economist table). Surely there is a lot of waiting and seeing to be done here, as Mr Trump’s policies, shall we say, lack clarity? But there are a number of differences with the UK. The first of these is that the US is an economic superpower, which dominates global financial markets, with the dollar used as the top reserve currency. It is much easier for the country to draw in investment that the aging middle-ranking country that is the UK. It has much more secure access to liquid, short-term funding. And with a huge domestic market the outlook for its businesses look less precarious than that for British ones.

But the most important difference is that, for all Mr Trump’s lack of clarity, what is known about him, and the Republicans who control Congress, points to a loosening of fiscal policy. This mainly takes the form of tax cuts. This increases the demand for dollars, because it will increase spending in the US domestic economy. Exactly how remains to be seen. On one version US corporations will repatriate foreign profits and invest in infrastructure. This is all uncertain – but Mr Trump and the Republicans in Congress certainly agree on tax cuts, especially for the wealthiest. And this happens at a time when most people are convinced that the US is running at close to capacity – so there is no question of fiscal laxity being complemented by monetary laxity, which would allow the increased demand for dollars to be met by extra supply. Indeed the Federal Reserve is in the process of tightening policy, and increased interest rates this month.

This economic dynamic is often not appreciated – that in a world of freely floating currencies and open capital markets, loose fiscal policy leads to an appreciation of the currency. But there are plenty of examples if you look for them. When Germany unified in the early 1990s, it involved a considerable relaxation of fiscal policy – which caused the Mark to appreciate, and a crisis in the European Exchange Rate Mechanism in 1992 that forced Sterling to leave, shredding the credibility of John Major’s Conservative Government. My Economics lecturer at UCL used the British government of the mid-noughties as another example – the government ran a larger budget deficit than was warranted at that point in the economic cycle, at a time when banking laxity had already led to excess demand in the economy.

The effect of fiscal policy on a floating currency is part of what is known by economists as the Mundell-Fleming model, proposed independently by economists Robert Mundell and Marcus Fleming, leading theorists of floating currencies. It is one of the reasons that floating currencies are not quite the free lunch suggested by many Anglo-Saxon commentators. It means that a floating rate tends to neutralise fiscal policy (just as a fixed rate neutralises monetary policy). As a currency appreciates, the current account reduces (or deficit gets larger), and any increase in aggregate demand is lost across the world economy. Unless monetary policy operates in the same direction (including “printing money” to monetise the budget deficit), in which case you are in effect operating a managed exchange rate policy. This often ends in inflation or default.

This points to one of the tensions in Mr Trump’s economic policy. Fiscal laxity will lead to a widening trade deficit – exactly the opposite to what he promised on campaign. That will tend to force him into protectionist policies, which in turn could create a doom-loop of global proportions. Many believe that we have the makings of another global financial crisis, especially given developments in the Chinese economy – for example read this from Yanis Varoufakis.

But another tension could be that Mr Trump’s fiscal stimulus proves ineffective. The rich people and corporations that benefit from the tax cuts save most of their winnings; planned infrastructure spending is lost to political friction; and Congress insists on dismantling the social safety net, especially Medicare, sucking demand out of the system by hitting the less well-off. That would mean that growth is disappointing, breaching another Trump campaign promise.

But that’s in the future. For now participants in the financial markets are readying themselves for more demand for dollars, and weaker demand for pounds. They aren’t taking a view on the wisdom or otherwise of either Brexit or the new US regime.

Competence, cosmopolitanism and change. And fewer experts needed forthe liberal fightback

Liberals are traumatised by the Brexit vote in Britain and Donald Trump’s victory in the USA. The margins were very fine in both cases, but that is little comfort. Things weren’t meant to be that close. And more shocks could be to come. It isn’t too late to fight back. But how?

And here there is a lot of confusion. Some want to coopt the tactics of the populists and fight dirtier (like the Guardian’s Jonathan Freedland); others say that we should stick to the issues and avoid personal attacks (take this piece from Luigi Zingales, building on experience with Silvio Berlusconi); others again suggest that we follow a populist left agenda in the manner of Bernie Sanders; or perhaps stick with the centre right (such as France’s Francois Fillon or Britain’s Tony Blair). Or meet the populists half-way by conceding immigration controls and restrictions on trade.

All of these ideas are flawed. One striking feature of both the British and American situations is just how divided the public has become. Accommodating one side of the argument means creating resentment on the other. Bernie Sanders would surely have lost more votes from Hillary supporters than he would have picked up from Trump ones. Recent polling on Brexit voters show that very few on either side have changed their minds.

We should be careful about accepting the populist narrative: that they represent a rebellion by the public against an elite. Most of the people I meet are on the establishment side of the argument, and are passionately opposed to Brexit and Mr Trump. But they are very far from any elite establishment; we are as ordinary in our way as the rebels. And all any political process does is to exchange one elite for another. As Brexit and the Republicans take over, there are going to be just as many angry and resentful people as before – but they will be different people.

Two ironies strike me here. First is that Mrs Clinton was right when she accused half of Mr Trump’s supporters of being a “basket of deplorables”. Saying so was one of the biggest mistakes of her campaign, and it showed a complete lack of political judgement  because it reinforced the idea of a sneering elite. And yet it is hard to see that there will be any reconciliation with people who have convinced themselves that the problem with the US (and Britain) is that an essentially white heritage is being polluted by incomers, and that the country needs to return to the values of the past. But there is the other half of Mr Trump’s supporters, who simply lost confidence in the establishment and just want to shake things up.

The second irony comes from  a seminal moment in the Brexit campaign when leading Brexiteer Michael Gove said that people had had enough of experts – because so many experts were advising against change. And yet the liberal side of the argument was badly let down by experts – or those that were advising their campaigns.  In America those experts has parsed the 2008 and 2012 election campaigns in minute detail and thought they had cracked it. Poll analyst Nate Silver made his reputation by predicting the result with precision in 2012 long before polling day. And yet the expert strategies in 2016 amounted to picking up pennies from in front of a steamroller. They lost the wood for the trees.

What are the experts saying now? They are very quiet, but I think can I guess what they will be saying. Don’t panic. Use the confusion and resentment emanating from the new ruling elites to build up a protest vote. Normal service will be resumed.

Well the Trump administration and the Brexit-supporting Conservative government will offer plenty of ammunition to opponents. But it isn’t enough. The British Labour Party thought it had the Conservative-Lib Dem coalition on the ropes in the years up to 2015 – such was the popular anger against austerity policies. And yet they lacked a convincing alternative, and all they succeeded in doing was pushing Lib Dem voters into the arms of the Conservatives, while being unable to contain the popular backlash in Scotland. Labour are trying something different now, with a lurch to far left – and the signs are that this will be even less successful. The populists are absolute masters of blaming anybody and everybody else for their problems, and they know how to stir up their supporters and create doubts among the uncommitted.

So what to do? I think that three things need to be at the heart of any fightback: competence; cosmopolitanism and change. Competence because that is what people will soon be yearning for, especially in America as the Trump regime takes control. People like the idea of somebody that creates chaos more than the fact. So any alternative must look like a cool, safe pair of hands. And, I would add, because this goes alongside it, somebody that cares about truth, and can admit awkward facts.

Cosmopolitanism because that really is the only way forwards. The genie is out of the bottle. We are going have to get along with people of different nationalities, races and cultures. There is no future in harking back to cultural distinctiveness. We must grow more confident in our own cultures and learn more from others. Ironically even the populists are doing this amongst themselves. If there is anything that unites the half of the population that is resisting the populists, it is a belief, at some level, in cosmopolitanism. Rallying this group is critical.

Well, Hillary was competent (except at campaigning) and cosmopolitan; and that was not enough. We also need to show that we believe in change. We must accept that the establishment orthodoxy of the 2000s was wrong in many respects. The relentless quest for a narrow vision of economic growth and the crushing of human control in the name of productivity and modernisation must end. All they do is enrich a few lucky people. We need a new vision of modernisation that takes to heart that most successful of Brexit slogans: “take back control.” And our experts won’t be much help here: we need new vision.

So we need new leaders that stand for competence, continuity and change, and are able to see beyond the myopia of experts. Justin Trudeau has done it in Canada. Who will do it in Britain and America? Oh how I wish I knew the answer to that!

 

 

 

Making America small again. Trump’s victory marks the decline of the USA

“Make America Great Again.” That was the slogan of Donald Trump’s insurgent campaign to take the US presidency. It resonated with many Americans. They felt that the US had been subject to serial humiliations in its international dealings, and that Mr Trump’s more robust and confrontational leadership would help to reverse it.

But politics is full of paradox. To exercise power is to diminish it. Power accumulates to those who understand restraint. In Britain English and Welsh voters took to heart the slogan of “Take Back Control” and voted for Brexit. The country is now basking in the thrill of exercising direct power in its relations with its fellow European neighbours. And yet the result will be a medium-sized power adrift in a friendless world, seeking to trade freely when everybody else is becoming more protectionist It will be more rather than less subject to the whims of foreign powers. Britons may prefer it that way, but they will come to understand that the keys to “taking back control” actually lie in Westminster and their local council chambers, rather than in Brussels.

So it is in America. Mr Trump’s supporters will revel in the assertion their country’s direct power. And yet he will exercise this assertiveness in order to carry out a retreat. The result can only be diminishment, relegating the US to the middle part of a medium-sized continent.

Let’s look at some specifics. Consider the Trans Pacific Partnership (TPP): the multinational trade deal put together by President Obama. This was a central element of his Asian diplomatic strategy, designed to collect a number of Asian countries into America’s orbit in trading terms, conspicuously excluding China. Mr Trump (along with many Democrats) denounces this as a bad deal and will scrap it. That leaves a vacuum into which China is ready to pounce. It plans its own version of a free trade area, involving most of the same countries. Mr Trump has also questioned the value of America’s military alliances in the region. The clear message to countries there is that they must acquiesce with China’s increasingly imperial ambitions. The Philippines’ President Duterte looks a little less eccentric in his pivot to China. The USA is suddenly a much less important country.

Mr Trump’s promised assertiveness in trade relations with China makes little sense either. It comes at an important moment in the evolution of China as a nation. It has built its economy on international integration, especially with the US, and developed a large trade surplus in the process. But there is nothing particularly beneficial in a trade surplus – it implies that a country’s citizens are consuming less than they could – an act of self-denial. A trade surplus has political advantages – it makes you less beholden to foreign creditors – but China is already powerful enough for this not to matter much. So it is in the process of carrying out an economic pivot to  develop its consumer economy, and away from integration with developed economies – though the scope for integration with less developed economies remains. An economic model where it exports less to America and integrates more with other Asian countries, and even African ones, suits it just fine strategically. Mr Trump means to hurry it along, but it will disrupt the US economy more than the Chinese one.

In Europe the issue is not so much trade. The proposed trade deal between the US and the European Union, TTIP, looks dead in the water without any help from Mr Trump. The main issue for Europeans is military and diplomatic support for the European countries against Russia in particular. Mr Trump has said that the current balance involves America in a disproportionate level of commitment. He has a point. If America steps back from its military commitments, and caves in to pressure from Vladimir Putin to create and extend a Russian sphere of influence, then it will put European countries in a very tough position. It is not very clear where this will lead – but one thing is very clear: America will be less important to Europe. This is not necessarily a bad thing for Europe, but it will be very uncomfortable.

And then there is economics. We are still guessing what will emerge from Mr Trump’s presidency – but there could well be a short-term lift for America. Some form of fiscal stimulus is in the offing. Mr Trump and his advisers hope to lure in US corporate profits that are stacked offshore for tax reasons, and to use the proceeds to fund infrastructure investment. Unlike many of his Republican colleagues, Mr Trump will be reluctant to cut state handouts, like pensions or healthcare – though health insurance is under threat. This could give a short term lift to the US economy . And, as this week’s Economist points out, much of this gain will be at the cost of other world economies.

That should please Mr Trump’s supporters. But the problems will start quickly. The stimulus is badly timed. In many aspects the US economy is running at close to potential output. All the stimulus might do is suck in imports and push up prices. But there may well be a lot of hidden potential in the US economy – more workers could be drawn into the workforce, and other workers could be made to work more productively. But if Mr Trump is serious about rolling back free trade and driving out foreign workers, then he will cut the capacity of the US economy when it needs to be increased. A financial crisis is in the offing.

The truth about the American economy is that, far from being taken for a ride and funding lavish lifestyles of foreigners, American consumption is being supported from abroad. This is what a trade deficit means. A transition to a more self-sufficient economy, as wished for by Mr Trump’s supporters, will entail economic shrinkage. Americans may rail at the loss of jobs in many industries, but they exchanged these for cheaper products, made abroad or with automated technologies, or both. Reversing that means reducing living standards.

Except that most Americans could still end up better off. If the country can share out income more evenly, with lower profits and higher wages, and more of those wages paid to middle and lower level employees and less to the top layer, then this shrinkage need not be painful to the majority. But what chance is there of a Republican administration, run by senior businessmen, achieving that? To Mr Trump exploitation is simply good business practice, and profits are reward for enterprise. There is no sign of a mindset that wants a different distribution of the fruits of economic success.

America and the world is in for a rough ride. But strategically it has been clear for a long time that American power, relative to the rest of the world, is in decline. That is not such a bad thing  – it results from a fairer distribution of the world’s wealth. After the diminishment of Europe, it is now America’s turn. Mr Trump’s victory marks a big step along that journey. But it should surprise no follower of politics that he is claiming to do the opposite.

The centre collapses. What should liberals do?

Unlike on 23rd June (the day of the British referendum on the EU) I went to bed with a sense of quiet foreboding on Tuesday night. And that foreboding was confirmed by the shocking news of Donald Trump’s victory in the US presidential election.

It is a bad year for liberals. Some liberals did support the British vote to leave the EU, of course, and persist in saying this was a good thing. Well, maybe, but the campaign was not fought from the liberal centre, it was fought and won by those who persuaded the illiberal to vote in their masses – which is similar to Mr Trump. Meanwhile, illiberal governments face no serious challenge in Hungary and Poland, and in Turkey President Erdogan is crushing all forms of opposition, liberal and otherwise, following the example of President Putin in Russia. It does not seem so far-fetched to imagine that Marine Le Pen will take the French presidency next year. There are major populist uprisings in the Netherlands and Italy.

All this points to a collapse in the political centre. What do I mean by that? The centre is a set of political assumptions about the way the world should be run which has become the conventional wisdom of our governing classes, and which is shared by many political groupings. Those who did not support this centre used to be branded as extremists and pushed to the margins. Or sometimes parties would talk as if they were challenging the centre, but quickly adopted its principles once in power – France’s François Hollande comes to mind. Centrist principles incorporate free trade, free movement of capital and free movement of workers – an unmistakably liberal combination. Globalisation, and the economic growth that went with it, were embraced. Social liberalism ran alongside these principles, with the promotion of diversity at all levels of society. In Britain, Tony Blair’s enthusiastic embrace of these centrist values was the key to his taking the Labour Party to three election victories in 1997, 2001 and 2005. The Conservative victory in 2015 largely came about because it persuaded electors Labour had turned away from the centre – though, in a portent, the avowedly centrist Liberal Democrats were crushed in the process.

But Mr Trump’s campaign was based precisely on a rejection of the centre. He painted a picture of a politically corrupt and complacent elite who had let people down, and imposed social liberalism onto unwilling subjects. This brought previously apathetic voters out of the woodwork, and persuaded many who had voted for the left in the past – blue collar workers in particular – to change allegiance. By comparison Hillary Clinton struggled to raise enthusiasm for her campaign; this apathy may actually have been more important than enthusiasm for the insurgents. It would be wrong to blame that on her personally. She was in fact a strong candidate, but she represented a ruling philosophy that people have lost faith in. President Obama may be more charismatic, but his intervention seemed to have little impact. He seemed to be part of the problem.

Could the left have achieved a similar success with its own anti-establishment campaign? This is what Democratic contender Bernie Sanders attempted; and it is what Britain’s Jeremy Corbyn seeks to achieve. Like all counterfactuals this is impossible to prove. Many of the criticisms against Messrs Sanders and Corbyn – their lack of so-called “credibility” – seemed to positively benefit Mr Trump. But I think the rebellion is about more than changing personalities and attacking the political elite. There are overlaps in policy; Mr Sanders wanted to clamp down on free trade and attack big business – just as Mr Trump  does. But he also stood for big government and social liberalism. These do not resonate with the disaffected. It might rally a lot of younger, urban people – but not the white working class. It would not have been hard for the Republicans to paint Mr Sanders as in fact being part of the liberal elite, who would bring with him socially liberal values, more interference in people’s daily lives, and higher taxes.

But for all that, the liberal left shares a disillusionment of the conventional centre with the conservative insurgents. They see the economic gains going to a lucky minority, while working class, and many middle class, people face increased insecurity – especially if they are young. The trouble is that the left lacks a convincing policy agenda to address it. Their solutions have a lot of the “same old” about them. And in particular they lack ideas on how to promote a thriving business environment, beyond more active demand management through fiscal policy, also promoted by Mr Trump, it has to be said.

So how to respond? Of course Mr Trump and his associates equally lack a convincing policy agenda to address the concerns of the left-behind. They will throw them some socially conservative red meat, but it is hard to see their economic policies making them better off. Meanwhile many social benefits, starting with health insurance, will come under threat. This gives the left the raw ingredients for a fightback. The developed world is becoming more socially liberal, so liberals must hold their nerve. And as conservative economic and foreign policies fail to gain traction, there will be more sticks to beat the conservatives with. Competence may come back into fashion.

But the left still needs a convincing policy agenda of its own. The old centrist agenda needs to be picked apart and put back together again. In my view this means a strengthening of local communities. Somehow a flourishing global economy needs to cohabit with flourishing local economies. Our hope must be that as Mr Trump as his conservative allies test their economic ideas to destruction, it will open people’s minds to fresh ideas. But those fresh ideas need to be fleshed out.