Politicians should be wary of vested interests in the economic debate
May 24, 2012 3 Comments
On Monday the 2020 Tax Commission final report was published. Other websites have picked over the bizarre elements, the major problems and highlighted certain strengths better than I could. This blog will not discuss all of the report itself but instead use it to raise a broader point. These reports are productions by groups of self-interest and must be treated as such. Think tanks such as the Taxpayer’s Alliance often lack transparency about funding. I can’t find such information on their website and emailing to ask who funds them has not led to a reply (nor did it for George Monbiot). Polly Toynbee wrote a good piece a while back that articulated the problems of that think tank in particular. The TPA supports the self-interest of large business owners and leaders in lower taxes, regardless of the consequent costs for everyone else. What is more annoying is that they are sought whilst many intelligent economists without such evident self interest are ignored. Business leaders and their stooge think tanks seem to be given a preferential place in all economic debates.
This is a cross-party phenomenon that has been going on for far too long. Sure, business support is all well and good, but it should not be the be-all and end-all in economic debates. Tony Blair wrote in his memoirs that he knew Labour had lost the 2010 general election when business came out in support of the Conservatives. He wrote that once you lose chief executives, ‘you lose more than a few votes. You lose your economic credibility. And a sprinkling of academic economists, however distinguished, won’t make up the difference.’ (681) Given Blair’s obsession with courting business support, it seems it was more than just another cheap shot against Gordon Brown. The Conservatives have had a more established deference to business. Appeal to business authority was one tactic used in 2010 by Osborne trying to make the case for deeper austerity than Labour favoured. He said in his Mais Lecture in 2010 that his view was supported by ‘many leading business figures and crucially by international investors’. Both reveal an the misplaced confidence that credibility is primarily derived from business, a theme constantly repeated by journalists. For instance, in January the ever critical Dan Hodges welcomed Labour’s declaration that they could not reverse cuts as a demonstration that ‘Labour “flat-earthers”, who argued for no retreat in the face of the coalition’s austerity measures, or an electorate that views them as a necessary evil, have been routed.’ It has been a common critique of Labour despite the slowdown since the election of the Conservatives in 2010. Personally, I think credibility should be what works rather than by default with what business vested interests support. Business lined up behind Tory levels of austerity arguing that it would support recovery. As we have now gone into a double dip (or if the figures are off, are still flat lining at best), can we be a little more sceptical about their wisdom on all economic matters?
While the Conservatives slashed, people like Paul Krugman, Jonathan Portes, Simon Wren-Lewis were not heeded. They regularly write about measures that could improve growth such as investment measures. Portes repeatedly emphasises about how low interest rates are a reflection of economic weakness rather than strength. Instead of such growth measures, business has been indulged. Corporation tax has been cut and the top rate of tax is to be cut to 45%. Even the former head of the civil service was critical of this. Gus O’Donnell said recently of the change to the top-rate of tax:
“What struck [me] was the – it’s buried away in a footnote – solution to one of the all times biggest problems that economist have faced, which is what’s the income tax rate which maximises revenue? And there it is, nobody’s mentioned it really, it’s there in a footnote: 48 per cent. That’s what’s there in the OBR report.” Which would suggest that 45p is, for revenue-raising purposes, as low as any sensible government would go? “It would suggest that under that model a move to 45 to 40 would have a very large cost, that’s right” he replies.
Personally, I think that the sceptical note of economists is the better line to follow than a think tank of the pro-cuts ‘everything-must-go brigade’. The Laffer curve is the normal resort of those who want to cut taxes, and therefore state spending, in think tanks. Unsurprisingly, it crops up in the report. However, Cameron would be better off heeding the words of Geoffrey Howe, Thatcher’s first chancellor. Whilst making huge changes to economic policy in other areas, he was never persuaded of the merits of how Laffer was applied. He wrote in his memoirs that ‘My Treasury team and I had never succumbed – never seriously anyway – to the mistaken interpretation of Lafferism, which have led some US policymakers so far astray.’ The US was left with huge deficits and little growth in the 1980s to show for Laffer style tax cuts. Politically, measures such as cutting taxes for the richest have been a disaster for Cameron too, even prompting Miliband’s recent soar in the poll (from admittedly a loss base). Excessively sharp austerity, cheered on by pro-business think tanks, has led Cameron to this political and economic nadir. In future, it’d be better for politicians across the spectrum to engage with the debates between expert economists rather than being swayed by business bias.