gillian tett
GILLIAN TETT
Putting some heart into economics
On June 24 2016, the day after Britain’s Brexit referendum, hedge fund manager Richard Robb went jogging around Hyde Park in London. “Normally I find jogging excruciating and count down the minutes until the torture will end,” he admits in a new book, Willful: How We Choose What We Do. But that day, “I didn’t even notice. My pain was crowded out by the looming horror.”
Robb’s fund faced a potential crisis because its trades were vulnerable to the shock waves sent through financial markets by the surprise result. He feared a scenario where “the stain on our reputation would be long-lasting”, he recalls.
In the event, his terror was not justified. He averted disaster by drawing on skills honed while working for the Japanese Dai-Ichi Kangyo Bank (DKB) during the 1997-98 Asian crisis and, later, steering his fund through the 2008 Lehman Brothers collapse. He looks back on the incident today with relief at the way his team worked to overcome the predicament.
However, the experience also sparked something else. Robb is now on a crusade to correct the economics profession’s obsession with “rational choice” – the idea that humans always make logical decisions and seek to maximise self-interest. He points out that it does not necessarily seem “rational” for a wealthy former banker – as Robb was when he left DKB – to set up a hedge fund that involves risking money and reputation, and being exposed to events such as Brexit. “In reality, starting a business put my nest egg in jeopardy,” he admits. The reason he went ahead was because he was bored by early retirement and sought the exhilaration of work that challenged him.
Robb had spent the first part of his career doing a PhD at Chicago University, home to the “Chicago school” of economics, which promoted the idea that free markets and rational actors would ensure the perfect allocation of resources. His subsequent working life, however, showed him a world full of people pursuing jobs and activities that could not easily be explained by this model.
He concluded that we need a rethink. Sometimes we make purposeful choices to maximise self-interest; but often we pursue an activity “for itself”, because it supports our identity, gives psychic satisfaction and so on. “Acknowledging the for-itself gives us licence to embrace specific conduct that we can’t credibly explain to ourselves or others in terms of purposeful choice,” he writes. When I first read the book, I must admit that I was tempted to roll my eyes and say, “Well, duh!” Yes, many economists and central bankers used to be in thrall to the Chicago school. But behavioural economists have long scoffed at its ideas. As Robb notes, Daniel Kahneman, Richard Thaler and Cass Sunstein, to name but a few, have shown that mental biases and short cuts make humans anything but “rational” agents most of the time. There is an academic discipline known as “economic anthropology”, which tries to frame economics within a broader social and cultural context. For example, it looks at economics in terms of the widest possible definition of social and economic “exchanges” and values, rather than just monetary transactions.
Sadly, few mainstream economists have much idea that economic anthropology exists, least of all those trained in the Chicago school. That is partly due to the inward-looking nature of sections of the anthropology community, as well as the arrogance of some economists.
However, others, such as Robert Shiller, are starting to draw on anthropology – check out his excellent new work Narrative Economics for an example of this. I hope that more will follow. Robb’s snappy little book opens the path to a more comprehensive dialogue.
The book is also important in other ways. The fact that a former devotee of Chicagoan economics has explained why he rethought his views symbolises a larger shift in the paradigm. And it is relevant in terms of public policy. These days, we tend to debate employment using narrow economic criteria: hours worked, wages earned, household consumption, labour-market mobility and so on. Fair enough: most of us need a wage to survive (unless we’re wealthy former bankers). However, as Edmund Phelps, the Nobel Prizewinning economist – and someone who partly inspired Robb’s rethink – has long argued, we also need to find a way to create a more human-centric vision of economics. We need, say, to recognise the sense of dignity and community created by jobs that cannot be captured by numbers.
This is, of course, fiendishly difficult. Chicago-style economics produces charts, equations and predictions that seem reassuringly precise, so they are easy for investors and policy makers to use. The big drawback of behavioural finance – and economic anthropology – is that it often seems so vague that creating strategy from it can feel like chasing soap in the bath.
Robb tries to sketch out a decision tree to help investors, policy makers and economics students choose when to use a rational model of economics, and when not. It is rudimentary, but provides a platform for an overdue debate; particularly at a time when Brexit and the rise of populism have shown that it is foolish to predict voter passions purely in terms of economic incentives and numbers. gillian.tett@ ft.com; @gilliantett
‘We need to recognise the sense of dignity and community created by jobs that cannot be captured by numbers’
Manifesto. Radical pledge
Labour’s plans spell harsh corporate tax regime
CHRIS GILES
Labour’s radical election manifesto would create the harshest tax regime on business income among large advanced economies, according to comparable international tax data.
The findings will reinforce concerns that a Jeremy Corbyn-led government would undermine the attractiveness of the UK as a place to do business and skew the tax system out of line with other countries.
Once the extra burden of Labour’s proposal to force companies to hand 10 per cent of their shares to workers is taken into account, the effective tax burden on profits would be higher than any other advanced economy.
John McDonnell, shadow chancellor, yesterday maintained pressure on companies, saying his party would prevent businesses from taking the “easy option of cutting wages or raising prices” because “we’re democratising the way in which these corporations work”.
He told the BBC: “Instead of being driven by short-term profiteering and shareholder interest only, they will think for the long term, invest and grow the economy, and that’s what’s happening elsewhere.”
If Labour’s proposals for public spending were implemented, they would add just over 6 percentage points to the share of public spending as a proportion of gross domestic product, raising the level to roughly 44 per cent. That figure is not out of line with countries such as Germany and still below France.
But on the tax side, Labour proposes a radically different mix to countries such as France and Germany. According to the OECD, the Paris-based international organisation that collects comparable tax data, the UK’s taxes on profits raised 2.7 per cent of national income in 2016, well above the 2 per cent levels in France and Germany.
Even though Britain had a 20 per cent corporate tax rate in 2016, lower than the rates of 33 per cent in France and 30 per cent in Germany that year, revenues were higher because the UK taxes a much broader definition of profits.
As former chancellor George Osborne reduced the corporate tax rates between 2010 and 2017, he also expanded the reach of corporate taxes. Rupert Harrison, his then chief of staff, said: “It was base broadening and rate reduction, which was always the intention.”
Labour calculates that by maintaining the broad tax base, raising the UK corporate tax rate from 20 per cent to the 26 per cent level of 2011 and adding a new tax on multinational’s profits, it can raise an extra £30bn a year.
The Institute for Fiscal Studies said the move would imply “raising more in corporation tax than any other G7 country”, thereby casting doubt on Labour’s ambitions.
Other tax experts pointed out that the effective burden on companies would be even greater than the IFS had calculated because they did not include Labour’s requirement for large companies to hand over an element of their profits to create “inclusive ownership funds” that would give workers a stake in company ownership.
Dan Neidle, tax partner at Clifford Chance, said: “In its latest guise, [Labour’s inclusive ownership fund plan] is exactly equivalent to a 10 per cent rise in the corporation tax rate, taking corporation tax revenues to about 6 per cent of GDP.”
An effective corporate tax rate at that level would be higher than any other country in the OECD, a group that also includes the US, Japan and South Korea.
Britain also collects more in capital gains taxes and property taxes than other advanced economies, further undermining Labour’s claims that companies do not pay their fair share. OECD data shows the UK collecting 1.3 per cent of total tax revenues from capital gains compared with next to nothing in France and Germany.
Where the UK stands out in international tax revenue comparisons is not on a low level of revenue from taxes on company profits, but on very low levels of social security contributions.
Britain’s national insurance collects 19 per cent of UK tax revenues compared with equivalent social security taxes of 40 per cent in France and 37 per cent in Germany.
Paul Johnson, director of the IFS, said: “If you want to transform the scale and scope of the state then you need to be clear that the tax increases required to do that will need to be widely shared rather than pretending that everything can be paid for by companies and the rich.”
Labour’s proposals to raise £83bn for additional day-to-day public spending would raise the tax burden from an expected level of 34.6 per cent of national income in 2023-24 to 38 per cent.
This level of taxes would represent an all-time record level even higher than in the second world war, when Winston Churchill, then prime minister, raised public spending to 61.5 per cent of national income in 1943-44, but financed that largely with enormous borrowing amounting to almost a quarter of the size of the economy.
Concerns mount that proposals would damage attractiveness of UK as place to do business
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