Tuesday, June 14, 2016

Saturday, April 23, 2016

Brexit Bollocks

            A common complaint about the referendum debate from so-called “ordinary voters” is that while soothsayers and their opinions are many, facts are depressingly thin on the ground. In default of facts, the public is bombarded with unverifiable assertions whose reliability tends to be in inverse proportion to the confidence with which they are expressed. Some of the most forceful of these are manifestly untrue and routinely take the form of histrionic tantrums and insults - humorous and otherwise - directed at opponents. Bombast and fury, notably from advocates of the ‘Leave’ campaign, occupy the sound waves and headlines, elbowing out rational argument and well-researched analysis.  Boris Johnson’s scatological quip about the government’s referendum leaflet, for example, tells us less about the quality of the document than about the puerile humour of a man who, by some accounts, is using ‘Vote Leave’ as part of a plan to replace the current occupant of Number 10. If he succeeds, he will be the first overt buffoon ever to lead the country. Ambition, cold calculation of personal or corporate advantage seem more present among the ‘Outers’ than concern for the country’s future.
            By contrast, the ‘Remain’ campaign seems oddly low-key - probably because it is difficult, perhaps impossible, to be passionately angry about advocating “no change”. Yeats’ unforgettable lines come to mind:
“the best lack all conviction, while the worst
Are full of passionate intensity.”
            Not that we should in any sense admit the current UK prime minister into the ranks of “the best”. He is, as Anthony Barnett describes in his excellent piece, an inveterate dissembler, a callow purveyor of untruths. But with respect to the referendum, the arguments for ‘Remain’ put forward by Cameron’s team - and by Corbyn’s for that matter - give the impression at least of appealing to our intellect rather than to crude emotion.
            What is lacking so far in the ‘Remain’ camp is any sign that the manifest absurdities of  prominent ‘Out’ campaigners like Johnson are being subjected to scrutiny. So here is a taste of what such scrutiny might reveal.
            Among Johnson’s recent pronouncements is a claim that President Obama is a hypocrite for recommending that the UK remain in the EU (with a concomitant loss of sovereignty) when the US wouldn’t dream of sharing its own sovereignty with any other nation. That Johnson feels free to voice such an offensive insult suggests that he will say anything to advance his case regardless of whether it is fair, true, or an appropriate way of referring to a foreign head of state prior to a visit to this country.  This is embarrassing enough; but even worse is that his remark is patently untrue.  When, in 1994, the US government entered into the North American Free Trade Agreement (NAFTA), it surrendered a substantial degree of autonomy, as did the co-signatories Canada and Mexico. A complex and substantial range of NAFTA rules and regulations governs trade and investment between the three countries, a fact that has given rise to unease in some quarters at the loss of sovereignty supposedly involved.
            The idea that trading arrangements in the modern world are free of political consequences is, to borrow one of Johnson’s favoured epithets, piffle. All such agreements involve releasing control over some aspects of national economic life in return for expected advantages. Whether these involve a fundamental loss of sovereignty, rather than a reversible one, is another matter. ‘Leave’ campaigners are fond of pointing out with declamatory relish the percentage of UK laws now made in Brussels (a Farage speciality), and that various desirable initiatives of the UK government are stymied by EU regulation. What they overlook is that the UK parliament remains sovereign in law and that while, on joining the European Community (as it then was) in 1972, it agreed to acknowledge the supremacy of European law, it could not and cannot bind its successors. Like other EU members, the UK can repudiate existing EU legislation or refuse to sign up to new legislation with which it disagrees. As I have signalled in a previous piece, other EU members have a decidedly pick-and-choose attitude towards EU legislation; and the idea that the UK lacks this element of discretion is, to borrow once more from Johnson, bunkum.
            One of the ‘Leave’ campaign’s most outspoken storm-troopers is Daniel Hannan who, despite his distaste for the EU, is an elected MEP with a right therefore to enjoy the associated perquisites. A curious reversal of Groucho Marx’s refusal to join a club willing to accept him is Hannan’s adherence to a club that he evidently feels should have no members at all - not UK ones at any rate.
            As readers wearing armour plate can verify for themselves, Hannan has assembled  what he doubtless considers to be an imposing armoury of munitions against ‘Remainers’ and everything they stand for; and he expresses himself with the frightening self-confidence of someone for whom doubt is an alien concept, and facts are discardable or subject to revision if they fail to correspond with his vision. 
            An anti-EU article by Hannan in The Spectator  offers a summary of his views. He begins by telling readers that: “… the migration and euro crises are deepening, and Britain is being dragged into them.”  As an exercise in misrepresentation this could hardly be bettered. Given that the UK has not adopted the common currency, the euro troubles to which Hannan refers can only affect the UK indirectly through commerce; and since no one is advocating a cessation of trade with the EU, the issue is irrelevant to the case for or against Brexit. More sinister is Hannan’s reference to migration because it directs our attention, as he doubtless intends, to the refugees flooding into southern Europe from various conflicts in the Middle East, North Africa and elsewhere. Their numbers certainly qualify the phenomenon as a crisis, but it is not one created by the EU. If responsibility lies anywhere beyond the conflicting parties themselves, it is with foreign powers that have interpreted their role on the world’s stage as a right to meddle, to bomb, to invade, and to sell arms to those regions, with scant regard for the consequences.
            Hannan’s migration comment slides neatly over the UK’s own role in fomenting the migration crisis: the wreckage of Iraq that gave rise to ISIS, a dithering intervention in Syria, military adventurism in Afghanistan, Cameron’s pathetic failure to keep his promises on Libya, and so on. The inference is that we can and should close our eyes  and borders to the refugee problems facing Greece and Italy, and instead pursue a policy like those of Hungary, Macedonia and now Austria aimed at keeping out unwelcome hordes.  If Europe is descending into what may be the kind nationalism that we saw prior to WWII, then the EU project may come to an end anyway - not for the reasons cited by Johnson and Hannan, but because of a dispiriting failure to exercise the common solidarity that, in a globalised and increasingly volatile world, is critical to our well-being.
            What of the accusation that Brussels obliges the UK (and presumably all the other members) to accept unwelcome regulation? Here is Hannan comparing Swiss “liberty” with EU regulatory oppression:
“Zurich doesn’t need to worry about the expensive and sometimes downright malicious EU regulations that menace London: the Alternative Investment Fund Managers Directive, the short-selling ban, the bonus cap, the Financial Transactions Tax.”
Describing the EU as “malicious”, and its activities as a “menace” to London anthropomorphises it as a villainous creature intent on doing us down. Since Hannan offers a list of malign EU initiatives, let’s take a look at them. The Alternative Investment Fund Managers Directive (AIFMD) represents an attempt to limit systemic risk in the “alternatives investment” market, such as hedge funds and derivatives, that are widely considered to have contributed to the global downturn of 2008. Despite coming into force in 2011, only a handful of EU members have bothered to ratify it - the UK being one of them. No one forced the hand of government to sign up, and given the havoc wreaked on the world economy by out-of-control financial speculation, the menace would seem  to be not in Brussels but in the minds of those who wish to allow fund managers to carry on as before. One can only wonder at the reason why Hannan thinks the AIFMD threatens our well-being.
            The short-selling ban is a piece of legislation designed - like the AIFMD -  to foster financial stability in the light of lessons learned in the aftermath of the 2008 crisis, and it contains exemptions available to all member states; while the cap on (bankers’) bonuses - at an almost grotesque maximum of 200% of pay - seems so absurdly innocuous that to cite it as an example of EU maliciousness is either perverse or simply weird. Finally the Financial Transactions Tax is an initiative of the European Commission in which fully half of the EU members - including the UK - have opted not to participate.
            In summary, Hannan’s terrifying examples of EU malevolence turn out to be neither terrifying, foolish, oppressive, malevolent, or even obligatory.
            Turning to the cost of EU membership, Hannan refers to an obscure paper by “Professor  Herman Matthijs of the Free University of Brussels” in which figures are given for national contributions to the EU budget. Hannan’s complaint is that Iceland, Norway and Switzerland, which are non-EU members, only contribute €50, €107 and €68 respectively per capita, while the UK has to pay €229. What he fails to point out, either because the message is inconvenient or because of his own ignorance (he incorrectly describes Professor Matthijs as the only available source) is that the UK’s net per capita contribution after rebate and financial support deductions is not €229 but €118, equivalent to 2.5 pence per day.  By contrast, France pays €176 per capita, Germany €270, Belgium €302, and Netherlands a whopping €504 [1]. Of the twelve EU countries that make positive net contributions to the EU, only Ireland, Spain and Luxembourg pay less per capita than the UK.
              The UK’s position as a net contributor to the EU budget roughly corresponds to the country’s relative wealth per capita. This may come as a shock to those who have become accustomed to hearing - notably from ‘Leave’ campaigners - that the UK economy is the fifth largest in the world. Absolute size is far from being a reflection of economic success, and in Europe, the UK lies in tenth position in terms of GDP per capita behind Austria, Belgium, Denmark, Finland, Germany, Ireland, Luxembourg, Netherlands, and Sweden. Where the country stands proud is not in relative wealth but in achieving the rank of Europe’s most unequal country.
            Hannan’s peroration in his Spectator article borders on the delusional. In scratching around for evidence of how we could happily go it alone, he quotes the following from disgraced Icelandic Prime Minister Sigmundur Davíð Gunnlaugsson:
 “Iceland is much better off outside the EU. Unemployment is minimal, purchasing power has never been higher, and we have control over our own legal framework, currency and natural resources.” 
            Some might consider this comment to be a damned cheek as well as misleading. Iceland is the country that had to be bailed out by EU countries (plus Norway) when it went bust; and it adheres to virtually the entire EU framework - including the “Schengen” open-border arrangement from which the UK is exempt.
            On the BBC’s Today Programme, MP John Redwood, another ‘Leave” proponent, saw fit to trash the recent  Treasury analysis of the consequences of Brexit, before confidently affirming that “we will be better off out”.  He then excused the ‘Leave’ campaign’s lack of supporting data for this view with a stunning  piece of rhetorical self-contradiction: “Who knows what’s going to happen?”;  a question to which presumably the only possible reply is that of Voltaire’s potty anti-hero Dr Pangloss: “All is for the best…”
            Rhetoric rather than information is the ‘Leave’ campaign’s main weapon; and its case rests largely on arousing sentiments of nationalism, on appeals to emotion and to certitudes whose validity on inspection seeps away like sand through a sieve.
            Writing in 1934, Stefan Zweig presciently identified the difficulty as well as the fundamental  nobility of the European ideal:
            “The European idea is is not a primary emotion like patriotism or ethnicity;….it is not the product of spontaneous fervour, but the slow-ripened fruit of a more elevated way of thinking….the egoism of nationalism will always cut more keenly through to the average man than the altruism of the European ideal because it is always easier to be aware…..of one’s own kind than of one’s neighbour….If we cannot arouse enthusiasm for our idea (of European unity) in the heart and blood of our peoples, our effort will be in vain, for never in the history of change has the intellectual sphere and that of patient reflection ever triumphed.” [2]
            His warning went unheeded, with all the ensuing consequences. Former Greek finance minister, Yanis Varoufakis, speaks in similar terms in a recent interview with Owen Jones of The Guardian.  His message: we need to bond across borders if we are to avoid a descent into xenophobia, racism and ultra-nationalism.
            Perhaps, in the end, we just need to glance back at the last century, and learn.

[1] Net figures for 2014. Source: Laissez Faire
[2] Stefan  Zweig, The Unification of Europe in “Messages from a Lost World”, Pushkin Press, London.

Note: This piece first appeared in  opendemocracy.net

A Gulf in Understanding

            Great Britain and Ireland are the only members of the European Union with a legal system based on common law. Civil law prevails in all the other member states. These two traditions are the basis of quite different ways of approaching EU regulation; and they lie at the heart of some of the most critical misunderstandings between - in particular - the UK and the EU. They also  go some way to explaining why the UK seems constantly to struggle with EU bureaucratic rigidity and with what eurosceptics perceive as undemocratic regulatory incontinence.
            Custom and equity are the two guiding principles of common law: precedent tempered by a sense of what is “just”, so that while past judgements make up the scripture, they don’t necessarily override fairness.
            Civil law, on the other hand, owes its origin first to ancient Roman law - developed under the emperor Justinian - but also somewhat to the canon law of the Catholic Church. These were the twin influences that fed, under Napoleon,  into what became known as the Napoleonic Code which was subsequently adopted in most of Europe, with variations, updates and rewrites appropriate to each nation. For our purposes, what is important in the Napoleonic tradition is that the law is codified in the form of statutes. Under civil law, a judge is supposed to be able to reach a decision by applying logical deduction to the written code. If this proves impossible, it is theoretically either the fault of the judge for not understanding the law properly, or of the legislature for failing to keep the  code up to date.
            In common law countries, courts interpret the law, while in civil law countries judges follow and apply it. Common law plays out as a gladiatorial contest between opponents; while civil law works more as an inquisition in which the judge’s role is to expose the truth. What this means in practice is that the British tend to take the law literally, probably because its cultural basis is consent - a consent epitomised with respect to new legislation through acts of parliament but where judicial interpretation and precedent still hold sway. By contrast, those who live under forms of civil law work under what distinguished lawyers and  codifiers have written down. The Napoleonic Code (1804) was drawn up by a commission of four eminent jurists. Hence why Europeans tend to be more comfortable than the British with laws “made in Brussels”. Brits are simply not used to legislation being drafted by unelected bureaucrats or specialists; and some therefore conclude with sniffy condescension that while wein the UK are wedded to democracy those Europeans must necessarily be less so.  Eurosceptics are doubtless not alone in looking askance at the proliferation and seeming intractability of EU “rules”. and in wondering why the whole of Europe has not risen in arms against the Brussels bureaucrats.
            One answer lies in the fact  that the primacy of “the book” in the European legal tradition has given rise to a long-established custom of working through the interstices of the legislative framework whenever it seems possible and convenient to do so;  and where civil legislation is concerned, legitimate reasons may sometimes be found for simply ignoring the letter of the law in favour of a higher purpose.
            A few words of biblical context may help us understand the thinking. When, in the Old Testament, the Israelites demanded “like other nations” to have an earthly king as well as a heavenly one”, the prophet Samuel acceded to the request on the Lord’s advice, but only after warning the people that a king would use his power to bend them to his will. (Samuel Bk1, ch. 8).Thus began a dichotomy between human and divine authority that led along one path to claims that monarchs and spiritual leaders were divinely anointed, and along another to what became known as scholasticism, and subsequently under Jesuit influence as casuistry. The latter are forms of argumentation and abstract reasoning aimed at achieving a desired conclusion without trespassing on received dogma. Even today, Roman Catholics are used to discussing how and under what circumstances it is permissible to disobey the law. We are in the realm here of a cultural inheritance whose roots lie deep in the past.
            Different attitudes towards the law are fundamental to understanding why Europeans states seem able to handle EU  legislation even when it appears not to be in the national interest, while the UK - government as well as eurosceptics - claims to be powerless against its strictures.  While Brits tend to think that EU legislation is set in stone - however “undemocratic” it may seem - Europeans are used to working out ways to circumvent it or, at any rate, to avoid some of its unwelcome consequences.  A Spanish phrase summarises the approach: “La ley se acata pero no se cumple.” - the law is respected but not (necessarily) obeyed. This particular formulation arises from the Spanish colonial period when edicts from Madrid were dutifully acknowledged in the distant colonies of Latin America and thereafter ignored as “impractical”; but it is an inbuilt cultural characteristic of countries that have inherited the Catholic-Napoleonic tradition.
            How are these differences between the UK and the EU manifested? Let us start with the issue of nationalised industries. Maintenance of a level playing field between member states in matters of commerce is a prime responsibility of the European Commission  (EC) which is supposed to have wide powers of regulation. According to the EC, long-term state holdings in corporations are a form of state aid and therefore constitute unfair competition. Tories famously eschew nationalisation on ideological grounds, but both UKIP  and strong  Labour voices concur that the EU won’t allow it anyway. An illustration of the earnestness with which EU state aid regulations are treated as gospel is the government’s own manual on the subject published for the enlightenment of officials (downloadable, and excellent nourishment for masochists). For readers with less tolerant digestive tracts, an EC powerpoint focused on the steel industry provides the essentials of what we are supposed to believe. Clearly stated in the legislation is a prohibition on state aid for companies in trouble or for disadvantaged regions.  That would seem to put paid to Redcar, Port Talbot and the entire British steel industry. Too bad that Chinese steel, under the protection and sustenance of the Chinese state, is being dumped on the European market at knock-down prices! Too bad for the UK that is because, as has not escaped everyone’s attention, so many exceptions to the state-aid prohibition exist that there’s room enough for tanks to trundle through the legislative gate without touching the sides, Belgian, French, German and Italian tanks among them.
            Germany’s way with the rules is notably instructive. A  study conducted by the TUC in 2012 and which formed part of a submission to a government committee states that “….over the period 2010-2012, German industries, including energy intensive industries, benefitted from a range of reliefs from duties, levies and taxes worth EUR 26 billion, or some EUR 8billion a year. These reliefs are set to continue for the longer term”. Moreover, “…they cover a wide range of measures (including) grids, power plants, energy efficiency, renewables, energy research and compensatory arrangements for businesses competing at the international level "(my italics).  Nor is energy the sole framework for direct state aid to industry. Buried a little shyly in a long piece in The Economist on German manufacturing is an admission that the state doles out cash in support of industries that it thinks are important areas of growth, and offers “extensive” research facilities to small and medium-sized firms when they need help.
            All that seems to be required for these subsidies to pass ‘go’ is a careful reading of the regulations allied to a determination to ensure that these don’t interfere with German economic interests. Even when Germany is caught in a flagrante breach of the rules, as seems to have occurred with the subsidisation of Deutsche Post,  it somehow manages to avoid embarrassment or even bothering to respond.  Thanks to the Centre for Policy Studies,  we now know about Germany’s recent gas pipeline deal with Russia - a development  entirely contrary to EU energy policy but which the EC will doubtless be unable to prevent. Germany is, after all, the EU’s biggest beast and, like the ghost in Hamlet, “is as the air invulnerable and the EC’s vain blows malicious mockery.”
            Perhaps the most egregious German subsidy of all concerns exports to the rest of the EU - and, in particular, to the countries of southern Europe. Here Germany takes sublime advantage of the European Central Bank’s inter-bank payments settlement system known as TARGET2. Every time money flows from the banks of one euro member country to the banks of another, it does so through the TARGET2 system which works as follows. Let’s say a Greek dealer orders a consignment of luxury cars from Germany. The German exporter duly dispatches the vehicles while the Greek importer instructs her local bank to arrange for payment. This is effected via the Greek Central Bank, which then registers a TARGET2 credit in its accounts in favour of the German Bundesbank (central bank), after which the latter in turn credits the amount to the bank of the German exporter.  Because the deal is in euros no foreign exchange is applicable, and no money needs to change hands because these apparent financial transactions are just computerised entries. 
          If, for example,  the funds are lacking in Greece to pay the debt (which has been the case), then the Bundesbank simply registers a claim against the Greek Central Bank. 
At the end of February 2016, the Bundesbank’s TARGET2 claims amounted to EUR 605 billion. Prior to the onset of the financial crisis in 2008, the balance was EUR 71 billion, while at year end 2006 it was only EUR 5 billion. In other words, as Greece and other southern European countries descended into critical levels of debt, the Bundesbank’s TARGET2 balances swelled in parallel. TARGET2 credits have enabled the Bundesbank to finance and therefore subsidise German exports to cash-strapped Eurozone countries - albeit at some risk to the German taxpayer because if any of these countries had been “allowed” to default, German citizens would have had to foot the bill. Hence the German pressure on Greece to knuckle down to austerity and to flog off state assets.
            Admirers of German efficiency and apparent economic success tend to confuse the country’s reputation for meticulousness with straightforward dealing. Meticulous the Germans certainly are, and fine engineers too; but as the recent Volkswagen scandal has amply demonstrated, straightforwardness is not a characteristic to which they can fairly lay claim. An objective observer might be tempted to conclude that the German government favours the national interest above the interests of her European partners; but then it is to the German electorate not the EU that Mrs Merkel must answer.
            France differs somewhat from Germany in her approach to dealing with EU regulations,  though the objectives are similar. French nationalism is more overt, and direct state participation in industry more significant. The country maintains a large state sector, and readily finds
reasons for blocking foreign ownership of French businesses, not simply those one might expect such as defence or “foundation” industries, but any firm considered to be a quintessential representative of the nation. When yoghurt-maker Danone became a takeover target, the government took up arms to defend what the French Prime Minister referred to at the time as “one of our industrial treasures”; a striking contrast  with the UK government’s response to the takeover of Cadbury. But then France offers scant respect for “prohibitions” that are deemed not to be in the national interest, the attitude being that if an initiative is not allowed, then it will be redefined as “strategic” and therefore allowable after all, or simply met with a ministerial shrug of the shoulders and a sotto voce “on s’en fout” (we don’t give a damn). Here we see casuistry at work - if necessary with a defiant twist - in modern Europe. France has adopted a fiercely nationalistic policy of industrial development and seems unlikely to change course any time soon.
            Whether protectionism is good or bad is not the subject of this essay. What may be of concern, however, are the possible long-term consequences of industrial laissez-faire - or an over-zealous adherence to EU state-aid rules. One consequence is suggested by the annual Thompson-Reuters report on the top 100 global innovators, the 2015 edition of which has Japanese and US companies leading the way with 40 and 35 respectively, while France has ten and Germany four.  Among the newcomers are Korea with three and Taiwan with one.  And the UK? None.  In the short-term we may not notice much effect on our standard-of-living of what appears to be a lacklustre level of innovation, although the UK’s stubbornly low productivity may well be one; but who knows if in the medium-term we will not end up as hewers of wood and drawers of water in an economic universe controlled elsewhere? The UK’s finance sector currently feeds the government with tax revenues, and the low-paid service sector feeds the employment statistics; but they do little to foster the development of a vibrant, creative nation.
            Ideology, of course, plays a role in the UK’s policy - notable since Thatcher - of delivering the country’s industrial welfare to the vagaries of the market.  Ironically, the United States, considered by some to be the model of free-market thinking, is far less hesitant than the UK about protecting strategic industries. But regardless of the ideology at play, successive UK governments - and the current one not least  - have a history of bowing to EU regulations more punctiliously than any other major country.
            Nothing perhaps more clearly demonstrates the weirdness of the British attitude to EU regulation than the Hinkley Point C nuclear power saga.  In 2014, the EC graciously gave the UK permission to proceed with Hinckley Point despite serious misgivings about pricing and loan guarantees that bear a striking resemblance to state subsidies. Moreover, the proposed lead builder and operator of Hinckley Point is to be none other than EDF - a French state-owned utility company. Both the Austrians and the Germans have objected to what looks like a stitch-up, and in July 2015 they filed a lawsuit against the EC for its decision to override EU competition law against state aid. In March this year, the plot thickened when it came to public knowledge that the Information Commissioner has been refusing to reveal details of the full extent of subsidies planned for Hinkley Point. Unsurprisingly, the EC’s green light for Hinkley seems not to have been based on the regulations but on politics. France has taken the UK by the hand and shown that if you have the clout, the guile and the effrontery (in varying degrees) then rules become largely a matter of “consumer” choice and of keeping up appearances in case the hoi polloi (the smaller or more gullible countries) get ideas above their station.  If Hinkley Point goes ahead it will not be because the Austro-German lawsuit has failed, nor because the EC benignly looks away, nor even because the UK government wants it to happen. French self-interest will be the deciding factor - a conclusion as revealing about the EU as it is humiliating for the United Kingdom.
             A  word more  about democracy. France, and Germany among other EU countries have shown themselves willing to prioritise national interests over formal EU strictures when the two are in conflict. Their electorates would doubtless interpret this willingness as an example of democracy in action.  In the UK, by contrast, which makes a noisy virtue of sticking to the rules whether made in Europe or inherited as part of a sclerotic and unrepresentative political system, democracy seems to be little more than a smug soundbite, a totem of self-congratulation. The UK is not more democratic than our European neighbours. It is considerably less so; and the lazy failure of our political class to understand Europe, to grasp what it offers with both hands, to prioritise the national interest within a framework that is far more accommodating than we are led to believe, should induce us to question not whether we ought to be in Europe but why any of our politicians deserve our vote.

This piece was first publish in opendemocracy.net.

Monday, February 1, 2016

Googling Google

Asked in the Commons about the effective rate of tax paid by Google in the UK, Treasury Minister David Gauke refused to say on the grounds of “taxpayer confidentiality.”  Evasive replies of this kind - a typical variant is “commercial confidentiality” - are rarely, if ever challenged. As well as being a convenient refuge, confidentiality conveys an air of sanctity, so that mere reference to the word suffices to quell further enquiry. In many cases, however, and this is one, officials taking shelter under the confidentiality umbrella are probably doing so either to disguise their ignorance or to conceal the truth. Because although some significant information remains out of sight, much that is relevant, useful and enlightening - notably in the case of U.S. corporations - is readily available to public view.

Much can be gleaned from annual reports, copies of which can generally be obtained from corporate finance departments, especially if the inquirer is willing to pose as a potential shareholder. More revealing, perhaps, is the Form 10-K that  all US corporations with sales above US$10 million are obliged to file annually with the US Securities and Exchange Commission (SEC).  Form 10-K filings are available to the public without charge via EDGAR  the SEC database, and their level of detail makes the UK’s Companies House equivalent seem trivial by comparison.

Here is the first page of Google’s filing for year end 2014:

Like nearly one million others, Google is incorporated in ‘dodgy’ Delaware (The Economist description) arguably the most popular domestic tax haven for corporations within the United States.

Google’s financial results for years 2013 and 2014 appear as follows (click on the graphic  to see full table):

 Thus, in 2014, Google had revenues of US$66 billion, a net profit of US$17.3 billion and paid income taxes amounting to US$3.3 billion. Google’s effective income tax rate, therefore, was 19.3%. 

Google’s financial results are also set out as a percentage of revenues (click on the graphic  to see full table):

Here we can see that roughly five percent of Google’s revenues go to income tax. The confidential part is not the amount Google is paying, but which tax authorities are getting the funds. Gauke's refusal was not to protect the taxpayer but the government.

Although we can’t answer the payee question precisely, Form 10-K offers enough information to enable readers to make a reasonable guesstimate.  Of the company’s US$66 billion of revenues, $28.1 billion  or approximately 42.5% came from the United States. On this portion of Google’s business US tax would be payable.  From the table above,  we can see that Google’s net income before tax was 26% of revenues in 2014.  Let us assume, therefore,  that the profit rate on the company’s US business is representative of the whole, in which case we would expect US profit to be 26% of $28.1 billion or $7.3 billion.  The official corporate income tax rate in the United States is a whopping 35% (39% with combined state tax), although according to the World Bank and the IFC, this percentage comes down to an effective rate of  just under 28% after allowable deductions.  Using the 28% figure, the income tax payable by Google to the US government  on domestic business would be roughly $2 billion, equivalent to about 60% of Google’s total tax liability.

What about the remaining $1.3 billion of tax? Google’s headquarters for Europe, the Middle East and Africa is located in Ireland where the nominal corporation tax rate in 2014 was 12.5%. Ireland is where revenues from these areas of the world are registered, though whether or not Google has been  paying  even this lower rate is doubtful.  From Form 10-K for 2014, it is easy to figure out that if the bulk of Google’s overseas business flowed through Ireland and the Netherlands - both countries being venues for special taxation arrangements known as Double Irish with a Dutch Sandwich - little tax would have been incurred before the funds found their way to a tax haven, in this case Bermuda. Both Ireland and the Netherlands are members of the EU yet appear to have been openly tilting the taxation playing field in their favour. Ireland has recently modified its regulations to close down Double Irish, though the closure does not kick in for existing companies until 2020. Meanwhile, an alternative loophole appears to be there for the taking.

US corporations are taxed on their world-wide income, but since the US has double taxation agreements with most countries, they are liable to pay at home only the difference between the tax rate paid in other countries and the US rate. Why, therefore, is Google’s overall tax liability only 19.5% instead of 28%? The answer is that funds earned from overseas activities do not incur US tax until they are repatriated.  Hence why a vast stash of cash belonging to US corporations nestles in tax havens.   In 2014 Google had US$64 billion in cash and cash equivalents - a staggering sum. Failure to repatriate is supposed to be justifiable if the funds have been set aside for further overseas investment, but a statement to this effect seems to be all that is required.  Equally important, what emerges from this paradigm is that the US government, while overtly uncomfortable with the use of tax havens,  has an obvious interest in having corporate overseas earnings taxed wholly in the Unites States, and logically rather less in having other countries syphon off their portion before the funds move on. Tax havens are, therefore, potentially of benefit to the US tax authorities provided the funds held there by US companies eventually reach home base.

While we cannot be certain of the destination of our remaining $1.3 billion, we can expect both Ireland and the Netherlands to be picking up some tax income, and we can be sure that modest amounts have found their way to other countries where Google operates. It may also be the case that some of the company’s overseas profits are repatriated from time to time which would add to the US tax take.

What about the UK? Google’s UK revenues in 2014 amounted to 10% of the total or  US$6.5 billion. Apart from the United States, Great Britain is the only other country identified separately in Google’s Form 10-K, which probably indicates that it is the most important of the company’s overseas markets. Assessing the profitability of the UK business, however, is nearly impossible for an outsider because it is child’s play for a corporation to shift profits to a ‘convenient’ location.  It does this through what is known as intra-company trade by which a sister company registered in a low-tax jurisdiction charges a company in a higher-rate jurisdiction for royalties and ‘services`. However, we can acquire a sense of what Google should be paying in the UK by applying the Form 10-K figure of 5% on revenues (Google’s effective overall tax rate of 19.3% on income is close to the UK rate of 20%, so the 5% revenues equivalence seems reasonable). Based on Google’s own data, therefore, we can derive a theoretical UK tax liability for 2014 of roughly US$325 million or about £225 million.  This is the kind of sum that one might expect HMRC to demand at least as an initial negotiating position. Taxation law may intervene on Google’s side at this juncture; but that is a problem not for HMRC but for the politicians.

Hand-wringing over HMRC’s arrangement with Google is understandable given that the amount assessed (and widely publicised) is equivalent to a mere £13 million per year for ten years of back taxes. Such a paltry sum looks like a capitulation - not least because the Organisation for Economic Co-operation and Development (OECD) has drawn up a comprehensive framework for dealing with aggressive corporate tax avoidance. Known as the Basic Erosion and Profit Shifting Project (BEPS), it has recently been endorsed by all the member states. Implementation needs to be coordinated at least among the major players and will therefore take time; but with major reform in the offing it is hard to believe that HMRC officials could not have struck a tougher deal with Google - or simply have waited. We can only speculate as to why they did not do so.

Meanwhile, what can the concerned citizen do? The answer is plenty. This is not a case of helpless individuals powerless either to influence the course of events or to bring tax inequities to public attention. Thanks to a US tradition of openness and distrust of government, the SEC EDGAR database is open to all. So this is an invitation to pick out a few US companies for yourself and see what you can find out that might be of interest and concern to the rest of us.

Sunday, January 10, 2016

Neoliberalism is it…?

Samuel Beckett once remarked that he switched to writing in French rather than English because he considered it impossible to express anything in English that was not ambiguous. Linguistic reform under the auspices of the Académie Française in 17th century France resulted in a literary language stripped of foreign borrowings and regional accretions, and about which a century later  Rivarol famously claimed that “If it isn’t clear, it isn’t French”. [1] English, by contrast, has always been accumulative, happily borrowing from everywhere, unruffled by neologisms, grammatical innovations and ambivalence.

It thus came as a surprise to read in William Davies recent piece that the term neoliberalism has been savagely dismissed as ‘vacuous’ and that so ‘distinguished’ a pressure group as Progress as well as various other soothsayers have described it as a mindless insult employed by intellectually lazy people who have no sense of what it might mean.

In rejecting these complaints, Davies tells us that ‘neoliberalism’ is both complex and ambiguous because, like other watchwords of political discourse, it is an abstraction capable of multiple interpretations and shades of meaning, just like capitalism, communism, democracy, and liberty.  What concepts like these have in common is that they resist one-line interpretation; and the more we try to pin them down, the more complex and contentious they seem to become.  Inability to elucidate a notion, however, is not the same as lacking a general grasp of its sense.  Called upon to define our daily use of words of more than one syllable, many of us would probably flunk the test. However, that doesn’t make what we say unintelligible. 

Compared with some other candidates, ‘neoliberalism’ does not seem to be an especially elusive abstraction. I take it to mean marketisation of the public realm as a political project. Its current popularity among political leaders of a certain hue is that it has the appearance of offering value-free decision-making because it allows market competition rather than ideological bias to determine value. They are thereby absolved - at least in theory - from responsibility for the provision of important public services. In their place, the private sector runs the services on a competitive basis, or alternatively individuals and self-organised collectives take charge of their own needs. A recent example of the latter is the flood defence initiative in the North Yorkshire town of Pickering.

A core principle of neoliberalism is that citizens are to be defined first and foremost as consumers. Hence why ‘neoliberal’ governments insist on ‘consumer choice’ in sectors like like health and education, a proposition that derives its force from a now widely discredited but still vital element of classical economic theory which posits that consumers act rationally in their own interests. “Rational” is another word capable of multiple interpretations, but for economists it means optimising the benefit or utility of a transaction; and it is supposed to be what we do, even though three hundred and fifty years ago Pascal had already worked out that we don’t - not always at any rate.[2]  Here, therefore,  we must wave good-bye to Freud, Jung and the subconscious.

Critical to the idea  of ‘consumer choice’ is that, in exercising their decisions, consumers have clear awareness of the options available. Misleading advertising doesn’t exist in such an ideal world, patients can easily work out which hospital is safest for having their appendix removed, parents can select the best school for their progeny from a range of alternatives and, if they are sufficiently market savvy, can bag a place there before the “full up” sign appears on the gate.

Friedrich von Hayek (1899-1992) is often touted as the titular deity of neoliberal thought. [3]. He believed that free markets lead to spontaneous order (i.e. without the need for significant human intervention); and much of his work in this area can be considered as prolonged libertarian footnotes to Adam Smith’s ‘Wealth of Nations’. Where Hayek would have seriously parted from Adam Smith is that, in Hayek ‘s ideal universe, altruism is an aberration and either non-existent in fact or, as Ayn Rand would have it, irrational: “The principal of trade is the only rational ethical principle for all human relationships, personal and social, private and public, spiritual and material.” [4] If we want to do good,  Hayek contended, then we should look to our own interests because: “The morals of the market do lead us to benefit others, not by our intending to do so, but by making us act in a manner which, nonetheless, will have just that effect.” [5] This is, of course, a precise if less elegant rendering of Smith’s celebrated image of the “invisible hand’, the difference being that Smith didn’t believe commerce to be the sole pathway to benevolence.[6]

Not entirely careless of human deprivation, Hayek conceded: “…. that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody… there is no incompatibility in principle between the state providing greater security in this way and the preservation of individual freedom…” [7]

On the other hand, he disapproved of welfare, and of its corollary progressive taxation:   “…the principle of distributive justice, once introduced, would  not be fulfilled until the whole of society was organised in accordance with it. This would produce a kind of society which in all essential respects would be the opposite of a free society.” [8]

His answer to this rather muddy distinction came in a phrase that the UK electorate will readily recognise: the Great Society. Unsurprisingly, it involves, as far as possible, the withdrawal of the state from the provision of welfare, in the expectation that charities and individual volunteers will take up the reins. David Cameron’s slightly modified version -  the Big Society - about which we hear less and less, has been savaged by The Independent as  a sham because local charities that are supposed to carry part of the welfare burden have effectively become sub-contractors to powerful corporations which have taken over services formerly run by the state. Yet this is exactly what Hayek had in mind, as the UK’s current prime minister and chancellor are doubtless aware.

When, under neoliberalism, an absence of state involvement produces negative results, such as the 2008 banking crisis, or when  the private sector fails to meet minimum standards of service expected by the public, the state intervenes generally by imposing regulatory frameworks and inspection regimes, but not by restoring state provision.  This exposes a fundamental weakness in the theoretical foundation of neoliberalism because it rubs up against the demands of democracy. If the electorate votes for a set of policies aimed at re-nationalisation, for example, it cannot then be argued on neoliberal grounds that the public is failing to exercise ‘consumer choice’, and it would be simply perverse to contend that the government knows better.  Such an obvious  contradiction may be one of the reasons why Hayek, among others, had an equivocal attitude towards democracy. While he was all for democratically-elected governments, he called for a system in which they would be free of any obligation to do what the electors had voted for. According to Yale history professor Greg Grandin, Hayek told an interviewer during a visit to Augusto Pinochet’s Chile: “My personal preference leans toward a liberal dictatorship rather than toward a democratic government devoid of liberalism.”  Milton Friedman, a card-carrying neoliberal and Hayek fellow-traveller, thought fit to act as an adviser to Pinochet while the latter was engaged in the torture and murder of political opponents; and Margaret Thatcher, a Hayek acolyte, apparently saw no problem in befriending Pinochet nor, for that matter, in cosying up to other dictatorial regimes - especially if there were lucrative arms sales in the offing. Let us not forget that, in the stark neoliberal world, commerce is altruistic. Nor should we complain if neoliberal governments ignore their electoral promises. That is what Hayek would have them do.

William Davies writes that neoliberalism is “…about extending (markets or competition) to address fundamental problems of modernity…” ,   but except for the word itself, there is nothing especially modern about either the practice or the political programme that it implies. Rather it seems more like a reversal to a nineteenth century idea of social Darwinism whereby competition is supposed to ensure that the strongest rise to the top for the benefit of society as a whole.  Apart, possibly, from some misguided followers of Herbert Spencer, social Darwinism caught on solely in the disturbed minds of racial supremacists and disappeared with the defeat of nazism. That is until neoliberalism unearthed it in modified form later in the same century.
Readers of Dickens will be all too aware of what life held out for the poor in nineteenth century England under governments relatively unconcerned with the general welfare. Go back a little further to the eighteenth century and we can entertain ourselves with delightful descriptions of the lamentable condition of national infrastructure and policing, courtesy in this case of historian Christopher Hibbert:
“Coaches became stuck in the mud or overturned, their axles broke, their horses were lamed, their occupants thrown out with the  luggage into the ditch…..Horace Walpole described the roads in Sussex as ‘bad beyond all badness’…..Even the road between the court suburb of Kensington and Piccadilly was so ‘infamously bad’ in 1736 that Lord Hervey complained of living ‘in the same solitude as if cast upon a rock in the middle of the ocean.”[9]

Nor was travel safe from predation by highwaymen.  Hibbert writes that in 1774 even Lord North, the prime minister, was robbed in London’s Gunnersbury Lane; and that foreigners were astonished at the extent to which highway robbery seemed to be entirely normal. The Abbé le Blanc, on a visit to the capital, “recorded that in the 1720s highwaymen…. 'fixed up papers at the doors of the rich people about London, expressly forbidding all persons of what condition or quality soever, to go out of town without ten guineas and a watch about them, upon pain of death’.”[10]

Government involvement in social welfare, services and infrastructure thus came about not as the enactment of an ideology but for purely pragmatic reasons, namely that the private sector couldn’t or wouldn’t undertake the tasks nor make the necessary investments.
Long-term investment is not of course, an attractive proposition to the private sector, which is why successive UK governments have struggled to find investors for major projects. Distant returns are no return at all. It has taken years for a UK government to  be brought kicking and screaming  to the realisation that power stations will not be constructed without government involvement. The UK’s infamous Private Finance Initiative, initiated by John Major and enthusiastically adopted by the Blair/Brown government, has worked by dint of expensive income guarantees to the private sector.  What these and many other examples have highlighted, emphatically so since the 2008 economic crisis,  is that free markets are not free, that when they are poorly regulated they can and do lead to ruin, and that neoliberalism is sustained paradoxically by government intervention - though on a discretionary basis. The element of discretion is important because it tends to operate in favour of vested interests. Quantitative Easing didn’t go to the public but to banks and insurance companies.

Neoliberalism is not difficult to understand. It is a simplistic ideology worked out, one suspects, on the back of a payslip in the cafeteria of an ivory tower by professors who had little faith in human intelligence except, perhaps, their own. The overt objective is to make people subservient to the market because it is supposed to operate more intelligently than humans.  Isaiah Berlin would have recognised the neoliberal project as a tributary of “positive liberty” in which self realisation depends on the obedience of citizens to paradigmatic rules established “for their own good”.  Free trade deals offer a contemporary example in that, once they are signed and sealed,  they are difficult to undo; and parties that try to backtrack face the prospect at the very least of uncomfortable reverses in their terms of trade. The fetters of freedom.

Proponents of neoliberalism must necessarily ignore the history of economic development not only in the West but also in countries like present-day China and Korea where government responsibility for progress has been pivotal. To understand the potential dangers of neoliberal policies, especially to countries long-since run on social democratic principles (the UK still qualifies - just), we could do worse than look back to the extremes of inequality that prevailed in centuries gone by and to which we now risk returning; and we might recall the dispiriting features of unregulated capitalism that fired Marx’s outrage, and Dickens’ indignation.
“The world is too much with us; late and soon,
Getting and spending, we lay waste our powers.”

 So wrote Wordsworth. Before anyone had ever heard of ‘neoliberalism’, the poet knew well enough that defining us simply as consumers impoverishes us all.

[1] “Ce qui n’est pas clair n’est pas français."
[2] “Le coeur a ses raisons que la raison ne connaît point.” (The heart has its reasons that reason knows nothing of.) Pensées, 477, ed. Pléiade.
[3] Along with Ludwig von Mises (1881 - 1973) as the supposed ‘eminence grise’
[4] Quoted in The Journal of Ayn Rand Studies 6, No. 2, Spring 2005, p.378
[5] Hayek: The Fatal Conceit, 1989
[6] “However selfish man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though they derive nothing from it except the pleasure of seeing it.”  Adam Smith: The Theory of Moral Sentiments, I.i.1.1 (1759 - 1770)
[7] Hayek: The Road to Serfdom, 1944
[8] Hayek: Law, Legislation and Liberty, the mirage of social justice, Ch.12, 1973
[9] Christopher Hibbert, The English, A Social History, p 348, 1987
[10] ibid, p. 349

Monday, January 4, 2016

American Disdain

A friend in New York sent me the following links to pieces from the New York Times and Foreign Affairs. Here is my reply.
As often seems to happen with pieces about the UK or Europe written from the superb aspect of a New York skyscraper, it is a silly piece that could just as easily have been written about the UK’s or Europe’s ecclesiastical heritage - all those marvellous gothic cathedrals paid for by contributions from the common people and built by artisans many of whom couldn’t read or write and certainly wouldn’t have been able to follow the Latin liturgy.
 Now let’s look at the great masterpieces of European painting: where would Michelangelo have been without the Medici family? How many of Titian’s masterpieces would never have seen the light of day without the Habsburgs, or Goya’s without the Dukes of Osuna, or Van Dyke’s without Charles 1 etc. etc. etc.? Where would the history of European art be without the great patrons - monarchs and aristocrats, symbols of inequality, many of whom, if they are remembered at all, it is for their cruelty and corruption (Dante meets more than a few of them in ‘Inferno’)?
The UK’s aristocratic houses - from the medieval castles to the Palladian palaces and “Gothic Revival” extravagances of Pugin and contemporaries - all embody the duality of great art and great inequity. Where Charles Lambert is not simply wrong but - even worse - shows himself to be little more than a simpleton - is his inability to separate the art from the finance. It is a curiously American failing, a kind of pseudo demotic ideology - in which Americans fondly imagine that they have no aristocracy and can thereby pride themselves on having no stately homes or medieval castles. Of course, the Americans do have an artistocracy as anyone knows who has read Henry James; and what there is of significant artistic endeavour in the US is heavily dependent on the patronage of the wealthy (take a look at the Board of Directors of the Chicago Symphony or the New York Philharmonic).
What the Americans don’t have is a great artistic heritage. In the UK (and the rest of Europe for that matter) we have largely dispensed with the aristocrats - they are no longer important - but we have kept the masterpieces they paid for - not in hommage to them (Noel Coward was already behind the times) but because they are masterpieces. Lambert mocks the idea that National Trust “heritage buildings” could ever be thought to be “ours’. But he is wrong. The National Trust is ours. We the people have taken over those buildings from the original owners - most of whom over the centuries fell on hard times and couldn’t afford to keep them. Some remain in private hands, but they are run as businesses entirely dependent on the public for their survival, and since many of them are full of spectacular works of art and furniture, we don’t want them to follow the fate of so much great European art which is that of being sold to callow, super-rich Americans for their personal delectation and that of their wealthy friends. Here, these works are enjoyed by the public (and no they are not too high to be seen even by Lambert provided he is of reasonably normal adult height). In the US they hang in private homes. The US - in its mindless immaturity - is at a stage of socio-cultural development that Europe superceded in the wake of the First World War. And the patrician disadain with which some American writers depict Europe is regarded on this side of the Atlantic as the ridiculous prejudice of the ignorant, and the stupidity engendered by a surfeit of cash and a deficit of culture.
It is not beyond the bounds of possibility, of course, that the Americans are a little jealous of what they manifestly don’t have. Because what they don’t have most of all is cultural discernment. I well remember my first and only visit some years ago to the Getty museum(s) in Los Angeles (reportedly the wealthiest on the planet). My reaction? Among the genuine works were - it seemed to me - innumberable fakes. What bothered me was either that I was wrong or that the curators had no idea what they had bought and had a great deal more money than sense. Only much later did I learn that a newly-appointed British curator had bought himself a load of trouble by questioning the authenticity of some of the Getty drawings. My own reaction was less about the drawings (some of which were horribly crude) than about the “ancient” Greek sculptures at the "Getty Villa" which itself is a tasteless pastiche of an imaginary graeco-roman original. Conclusion? Americans think you can buy culture; Europeans know you can be a patron of the arts and of artists, but you can’t buy the sensitivity and discernment required to distinguished art from kitsch. That requires education, knowlege, and a degree of humility.
The other article - The Failure of Mutliculturalism - suffers from similar problems: a distant, patrician disdain whose occasional aperçus are vitiated by a wholesale lack of understanding of the immense - and I mean immense - advances that have taken place here in race relations and the enormous absorptive capacity of this small island to take in upwards of half a million immigrants a year of whom over half are not from the EU . Personally, I don’t think we have anything to learn about race relations from a country whose entire history is one of exploitation and discrimination against non-whites (including native American “Indians”); nor about immigration from a country that fences off its southern border against migrants from Latin America, and whose wealthy citizens hide themselves from the vulgar herd in gated communities in case they should be contaminated by contact with common humanity.