Varoufakis is wrong

Austerity and class warfare

I like Yanis Varoufakis even if he has chosen to spell his name in an idiosyncratic way. I like his enthusiasm and his style. I like his motorbike and I am personally indebted to his party for giving me time when facing serious problems in Greece in the early part of this century. His party, certainly before they got power, understood their role then in and to society in a way that the established parties of Pasok and New Democracy did not.

Nevertheless, for all my respect, it does not mean I think he is right! And as Yanis would have to admit, there is a big difference between what might be done in theory and what must be done in practice.

A while back, Varoufakis was quoted in the Independent suggesting that “Austerity” is actually a form of class-warfare. While Varoufakis is actually quoting Noam Chomsky (unacknowledged incidentally, or are they really joined at the hip?), his claim remains simplistic and at best, it merely acknowledges that, as a crypto Marxist, Varoufakis thinks class-conflict ought to play a role in the way economic policy has been dictated simply because Marxism says it plays a role in the way history develops. If there is class conflict in recent Austerity programmes then I suspect that is entirely incidental. I think, though, that it is also a bit rich coming from a man with a degree of domestic comfort that makes Mr Corbyn’s tax return look modest.

The poor have suffered from Austerity. That is quite true, but that alone does not make Austerity itself a “class war”. It simply means that Austerity causes casualties and that, as a remedy to the current economic crisis, the Austerity package is not properly thought through. “Austerity” is probably badly named anyway – it is not about being frugal with the national or international economy; it is about reducing public expenditure at a time when we are spending more than we are making. High debt, in other words, is recognised as an impediment to growth and should be curtailed. One way to do this is to increase taxation and the other is to decrease public spending. In fact, while claiming to be pursuing a policy of Austerity until 2015, our Government did not actually reduce public spending by much at all. (and there is an argument that the Government simply abandoned Austerity in 2012 and that this led to our recovery whatever the rhetoric. It again, rather suggests that “Austerity” does not work.)

Greece

In the case of Greece, Austerity has pretty-well destroyed the country, (the debt has gone up rather than down so proving that Austerity was the wrong medicine for the illness) but arguably the greatest destruction has been to impose an Austerity programme from outside and so to compromise Greece’s sovereignty and National self-esteem. To make matters worse, it was imposed by Germany -a country that benefited from debt cancellations after the war. Her post-war growth can be directly attributed to that. More than that, Greece was among the countries that cancelled the debts Germany owed it (one can think of the Viannos and Kalavryta massacres or of the 218 men, women and children slaughtered in Distomo, for example, in 1944 or indeed of the demand, in 1942, for the Greek bank to give Germany an interest-free loan of 476 million Reichsmarks which was used to pay for the military occupation of Greece?) on the understanding that a conference would be held after the reunification of Germany. That conference never happened and the debt Germany owed Greece was never paid (though Germany paid Greek individuals about 115 million Deutschmarks. If repaid now, the total debt to Greece would amount to between $14-$95 billion depending on the way it is calculated. The Syriza government calculated the amount to be 341 billion euros). If Greece had been allowed to devalue its currency, and had been given some form of debt forgiveness, then it would not have had to reduce public spending so suddenly and relentlessly. In practice, this process was interpreted both within Greece and by the International community as a punishment and has stifled growth. No one wants to sit with the naughty boy in the corner.

“Austerity” alone was not the problem. It was the way Austerity was imposed and the failure to keep the government fully on board which explains the problem. In Greece, a series of governments, from PASOK, new democracy to Syriza, has always pandered to its core vote. In the case of Syriza, that is the retired and current civil servants- hence bizzare pension reforms, a reluctance to cut public expense as well as a rise in unreasonable taxes (for instance, while public employees have remained fairly secure, the Self-employed have been penalised- Insurance contributions today often exceed half the monthly earnings and all private businesses are now expected to pay 29% of next year’s earnings! There are instances where the self-employed have to pay up to 70% of their income in taxes and insurance. It is unfair and completely absurd as it simply encourages tax evasion, bankruptcy and prologued unemployment because smaller businesses can no longer afford to take on staff).

Question time

On Question time, Varoufakis identified a number of tax issues in the past that may have needed clarification but certainly do not point to a class war. “To be talking about reducing the state further when effectively what you are doing is reducing taxes like inheritance tax and at the same time you are cutting benefits – that is class war.” A reduction in both corporation and income tax stimulates investment.

keynes 2.jpgThis is, at heart, something proposed by Keynes, even if it is often quoted by people on the Right and even if what most people remember about Keynes is his third option that Governments should borrow money and spend it. President Bush told Congress years’ ago, “To create economic growth and opportunity, we must put money back into the hands of the people who buy goods and create jobs.” Even so, it is worth noting that while reducing the amount of tax paid at the higher end, the Coalition Government was responsible also for raising the tax threshold in 2011, (helping the poor) and I think on principle there are some very solid reasons why we should cut taxes overall -cutting tax for both the rich and the poor, a principle incidentally that is absolutely the sort of thing Mrs Thatcher advocated.

Putting this into practice, though, is tough and events often get in the way of ideology and principles.

Ideal business policy

There are two ways to run a business. To employ as few people as necessary and pay them as much as you can or to employ as many people as possible and pay them each as little as is legally necessary. I much prefer the first model and I have seen the second model in action in both Greece and Russia. It is strikingly obvious that people who are not paid what they are worth, or who are not inspired or encouraged to do the most they can, are frustrated and unhappy. Yet exactly this second model has been rolled out with tremendous success recently in Turkey. A call went out to small businesses to employ more people and, so far, over 1 million workers have moved from welfare to work at minimum wage, with the Government topping up insurance contributions and tax. Once again, one size does not fit all. What might work in Turkey is unlikely to work here, but we should admire Erdogan’s direct appeal to a sense of National Responsibility.

Ideal taxation

Austerity is about a choice between increasing taxation or reducing public spending. I think there is a third way: I think we can reform public spending and also, at the same time, reduce tax.

We should look at what Turkey is doing and be inspired- because we also need our own sense of National Responsibility: specifically, we need to address the ways we collect tax and how we spend the money we get.

So, firstly, we need to recognise the principle that people of all backgrounds should keep as much of the money they earn. As I mentioned, that is something that was dear to the heart of Mrs T and I think it remains a worthy goal. (I was recently told that as a foreigner working in a State university in Russia, I should be taxed at a higher rate than nationals; indeed, I should pay twice the tax. Astonishing! It was made much worse to learn this after a very small amount was paid into my bank account. “I thought you knew” is not really an adequate explanation.) It still seems to be the case that individuals use money more wisely than large institutions and the higher the taxes, the less investment there seems to be, the less incentive there is. We need to look again at incentives to invest in public works.

I think Varoufakis is confused, because there are a number of models that support the principle of reducing tax, mostly to the rich- the laffer curve, beloved of Reagan, which suggests that taxable income changes in response to the percentage taxed, and so allows for the possibility that the less percentage we tax, the more people earn and so in theory, the amount the Government receives would be pretty much the same while the trickle down theory (which suggests favouring the rich ultimately benefits the poor) sounds patronising. In the end, the only moral approach is to reduce taxation overall. But part of that approach must involve a reduction in VAT. VAT is about not class-warfare. It is indifferent to class but it hurts the poor more.

By offering tax cuts to both rich and poor, George Osborne was not quite following the principles of Austerity, but rather reviving Thatcher’s moral vision- to reduce taxation as a whole. He was finally applauded by M. Lagarde who said, “At the IMF we have learned that there is no single best way to reduce the fiscal deficit. We clearly underestimated the growth of the UK economy in our forecasts a year ago.”

Secondly, we need to look at both the health service and social security because both systems are spiralling out of control; as we live longer, both long-term health-care as well as welfare dependency cannot be sustained in the present form. We know that is a problem with the current system, but there is also a problem with the way the system deals with those who fall outside the norm- I think it is appalling that we can see homelessness in Britain today, and it is appalling that many people struggle to access a proper doctor outside office hours. We have been seduced into thinking that one size fits all: it does not. We need to have a number of parallel systems -where one system might pick up what the other leaves behind. So, as we need to look again at welfare and health, both currently failing, we are not to embracing class warfare. Quite the reverse and we have a limited time to get this right. We must do more of this, not less.

Bureaucracy

The quick fixes of the last twenty years have, in effect, increased the number of bureaucrats who have managed a form of hybrid care that is neither genuinely private nor fully public. Bureaucracy is an attractive way to put a problem on hold because it is about passing the buck, but every new department that is created adds to the overall bill we must still pay. And in the end, the problem still needs to be addressed.

bureaucracy by TIM.jpg

We need to reign back the Bureaucrats. And what an opportunity we have: just once in a lifetime, there is an event that will actually decrease the numbers of bureaucrats- because Brexit will cull their numbers in Brussels, so we should be careful not to create yet another class of bureaucrats to replace the ones we are “letting go”.

Attracting clever people to generate clever solutions

If we want to improve social equality, then we also have to find both the money to pay for it and the people to run our schemes more imaginatively. We need to do that through an efficient tax system. Our progressive tax system, as it stands, incidentally already taxes the rich more than the poor, but VAT remains a scourge: it is a fairly inflexible tax that hits everyone and hits the poor more than the rich; it is something that we inherited from the EU, even if a rudimentary version of VAT was once introduced here during the war.

We need to attract top business brains to get us out of this mess. We cannot do that if they know they will be penalised themselves by a punitive tax system. (How would they react when they look at their first month’s pay? “I thought you knew” is no way to command confidence) We need to reduce tax overall not increase it, and that is an aim we should nurture across the board. Lower tax means an incentive to invest. Lower tax means attracting the right people who will devise systems that work!

Whether we like it or not, the coming Brexit will create a Government spending spree that would make both Keynes and Michał Kalecki smirk. But that should really be where it stops. Kalecki has emerged from the shadows of post war Poland to be cited both as an inspiration for Keynes and Varoufakis as well as a solution to our current woes. It is from Kalecki that we get the perfidious idea that a tax on the rich might help us. It will simply drive the rich away. The French have tried it. It does not work!

Brexit is change. And change is a chance for new ideas to emerge. It is no time to drive people away, but to invite them to contribute to the new reality of a post-Brexit Britain.

Part of the process of inviting people into Britain to help us and keeping the best people here is getting our taxation system right.

Some clarification:

  1. Rather than a crypto Marxist, Varoufakis calls himself an “erratic” Marxist. So I am being a bit coy here. I should be more direct.
  2. I think the point of this article is a bit lost. (a) Austerity is a fairly aggressive treatment and like chemotherapy, it can cause damage and is often not effective. It does not seem to have been effective in Britain and it has been deeply destructive in Greece and Brazil. But the principle of reducing debt is perfectly sound. It is simply about how it is done. (b) Varoufakis’ claim that “Austerity is class warfare” has become a mantra of the left. In fact, austerity budgets in France and Italy have imposed surcharges on those with incomes over 500,000 and 300,000 euros. Hardly an attack on the poor, but I think equally not a very effective source of revenue.
  3.  I did not address the issue of “retribution”: a theory that says the rich should be taxed more as a punishment for causing the banking crisis. In fact, over 40% of British do not pay any income tax (23 million people) so the burden of taxation has already shifted towards the richer Brits and the top 3,000 earners here (that is 0.01% of the total paying income tax in the UK) contribute 4.2% to total Government revenue as calculated in 2013. At the time the Treasury said, “The rich pay more under this Government than under Labour. The people who pay zero tax are the millions of low earners who have been taken out of paying income tax altogether due to George Osborne increasing the tax free personal allowance.” Across the Atlantic, the richest 1% of Americans pay 1/4 federal tax and nearly 40% income tax. So much for taxation. As spending cuts, however, hit the poor more than they hit the rich, the aim should be to restructure public spending rather than to cut it.
  4. Varoufakis, incidentally, I understand, also wants to reduce VAT. We agree on that of course! He is not so wrong after all.

“Britain’s punishment”

“Britain must not get a better deal than the members who stay fully committed – otherwise this is not punishment.

What an extraordinary comment by Sylvie Goulard MEP who acts like some sort of haughty Au Pair, trying hard to play “Nanny”. She goes on to suggest that when we leave the EU, we must also shoulder a leaving bill of between £42 and £50 billion. It is outrageous to be charged for leaving the shop.

It is more outrageous to be told this by the Au Pair.

In Moscow, I found it hard when I went into a department store that I was obliged to go through the whole shopping-centre rather than simply exit by the door I had mistakenly entered. It is like being steered through duty free, or window-shopping in Amsterdam in the hope we will be tempted by something. But this is worse. And more than that, it is shameless when a gathering clan of European politicians are openly talking of “punishment”.

The “punishment” is already in the wording of the Referendum- we are to “leave” the EU club. I think that is punishment enough! But this ridiculous lady thinks we should have additional punishment as well, and that any payments that are demanded of us must also be couched in the language of punishment? It beggars belief!

If she wants to fleece a customer who says he will not return, at least try to do it with finesse. To bar the door and demand a ransom for leaving. That is frankly communist! It is the stuff of the old USSR!

For me, only one thing matters now- far more than posturing about what sort of “Brexit” we would prefer- that we behave decently and promptly to the EU citizens resident here, no matter what the EU politicians propose, and if this is a demonstration of their bilious response, we need to set the moral compass well and truly in advance. Let us not sink to this vicious nasty spiteful tit for tat. This is not a game anyone will leave with dignity. We must rise above it.

We have had a bad start, let’s be honest. And it will not get better if Brexit talks stall in the face of imminent French and German elections. We need to deal with our issues of regulating the British market to take over from what the EU market was once doing- and we need to do that quickly no matter what sort of Brexit we ultimately agree politically. We need to co-operation of both France and Germany to do this, but instead we are triggering article 50 when both these two countries could not be more distracted! What folly!

Yet that folly is not what Madam Goulard criticises. In fact, almost no one recognises this particular folly! Instead, the post-referendum language that both sides have continued to wield is of hostility and threats, a giant game of chicken that oddly people in parliament believe might have a set of rules. There are no rules or certainly none that favour us. And more than that, if just one of the 27 states objects to any deal we arrange, maybe because they do not, or rarely trade with us anyway, they have the power to veto the whole process. This is not a game of cat and mouse- this is about a rat in the lion’s den and the rat is trying vainly to dictate terms.

Yet…the EU is, without doubt, also behaving very badly.

I have said before that the EU should be ashamed of the Referendum vote- that it was reason enough to expect Mr Junker to resign. He failed to provide Cameron with enough leverage to take into the Referendum anyway. Yet he remains.

But there is much more to madam Goulard’s pronouncements that meets the eye. This is a woman who is keen on the ever-closer integration of Europe (she is already president of Mouvement Européen-France), was advisor to Romano Prodi when he was President, who wants, indeed, to be President herself of that EU, who is confident enough to write not only in French but also for the FT in English. This is an ambitious lady.

It is worth looking at m Goulard’s approach to other difficult EU states-

About Greece, she repeats the integrationist line: “I believe in the team game. We should not even consider the case of losing a member state. It is not in the interest of the Greeks. It is not in the interest of the eurozone. But this requires effort from both sides. The Greek government should admit that any decision taken must be passed in the Greek parliament as well as the German and the French parliaments. Perhaps Europe should make some more positive steps. Both sides should agree that their future is common and be prepared to correct past mistakes.” She has pushed for greater transparency in negotiations, seemingly a good thing, but when all is said and done, even her recommendations and good will come with an acidic put-down.

Vague

She wrote about and took a major role in reversing the Greek Referendum (and arguably Grexit would have been better for Greece and almost certainly for Europe): “Sur le fond, Tsipras est resté très vague”, she said and indeed, let’s admit it privately, he really was, but it is not something we should ever say in public, surely! What condescension! Quelle folie! Tant d’agressions! But while Tsipras could be bullied into remaining in the EU, Mrs May, who frankly has been even vaguer (-extrêmement vague) at least until yesterday, has made it clear she is off and that no deal is better than a bad deal. It is not that surprising that Madam Goulard has, therefore, hit the presses today. What a thoroughly disagreeable woman she is.

sylvie goulard by TIM.jpg

The Olds have it! the Olds have it!

The ‘wiser’ generations, generally speaking, have a keener ear for nonsense. The EU, no doubt, a mushy construct of liberal ideology, bureaucracy, and hubris, must register on their radar with the footprint of some alien mega-spaceship – the stuff of Independence Day. The babbling of the ‘young’ can be dismissed as endearing but deluded naivety. So the grey voters crowded into the voting booths, walking sticks and all.

The tragedy is that now, in the wake of ‘having it their way’, this wiser generation has apparently paused, ‘realized’ its terrible mistake and, equipped with a wandering index finger, on the closest keypad, and in half an hour, has found an ‘online petition’ and signed it. Today, that petition is upwards of 3 million votes.

The most irresponsible part of this process is the lack of conviction.

Meanwhile, the lacklustre response that we have had from the EU means that they are still bureaucratic. The fact is that Juncker hasn’t yet resigned and that Merkel is still throwing her weight around as if nothing had happened, while Hollande and Tusk wallow in repeating useless platitudes;  and instead of begging the UK to sit at the table and discuss reasonable demands, these lords of Europe remain as supercilious and hubristic as ever. The fact that they claim to have looked at all options, mock Cameron for failing to prepare for Brexit, and yet have no contingency plans in place and that they insist on walking blindfolded to a political crisis of epic proportions means that they are as liberal and self-obsessed as they have ever been.

But the EU’s moves are being carefully watched by those young economists and young social commentators who voted stay, but who are now starting to think they might have voted the wrong way.

 Those working for the markets wonder, what country will follow Britain’s exit. Greece? Portugal? Italy? Will we see the partitioning of Spain with the Catalonian vote only 3 weeks away? How will the EU negotiate further fiscal consolidation between the Eurozone members, when each member can now play the Exit card?

juncker

Those with more of a cynical edge who write blogs wonder- how will a divided EU stand up to Russian aggression and export its principles of democracy beyond Europe? Can Europe really afford or allow the break-up of the United Kingdom? What happens to the UK’s seat as a permanent member of the UN Security Council? Should the UK’s permanent membership, in any case, or in the near future, be substituted for England and would Scotland, independently have its own claim?

There is, of course, the matter of greed: France and Germany, jealousy watched London become the financial capital of the World and profit from the riches that came with it. The French sacrificed their national pride to keep Paris beautiful, unharmed by German planes – so why aren’t American Investment banks flocking to Paris or to Frankfurt for their European headquarters? The answer is that investment bankers too have a keen sense for nonsense.

The UK will undoubtedly face economic consequences. It is widely expected that asset prices will fall, starting with house prices. The housing market has received two shocks this year, firstly, when Osborne (welcomingly) increased stamp-duty for second-time buyers, which so far has led to a 5% downward correction in house prices and secondly, with the Brexit vote. Real Estate Funds like JJL and CBRE have already started postponing their planned UK investments. CBRE only invested £180 this year, compared to £650 in 2013. Many leading investors are predicting a correction averaging 10% in the commercial real estate sector, particularly in London.

 The DAX, CAC and FTSE, which are all very good indicators of economic expectations, have dropped to 2011 prices. The pound and Euro are both taking a beating against the dollar and other currencies, while bonds yields have dropped to record lows; which together with an appreciation in the price of gold, indicate investment is drying up.

 It is perhaps too early to tell how the general economy will react, but a correction downwards in GDP figures is widely expected. The low exchange rates might improve exports, but that is expected to more than be countered by the fall in investment and consumption.

However, this isn’t all bad news. The fall in asset prices will provide much-needed relief to some social anxiety. Housing might, in this way, become cheaper for first-time buyers. Wages in the lower thresholds will probably increase as unskilled European labour goes home. The NHS will have fewer patients and doctors may have an easier time working, maybe only 10 hours a day. Parents will scarcely have to worry about getting places in schools.

The real losers might still be the EU. The money that was flowing out of depressed continental assets and into the UK, won’t stop flowing out. Switzerland and Norway will probably have their hands full in the near future. The hostility to investors remains a core principle of French liberalism (thus the EU); simply ask Emmanuel Macron.

Greece remains a troubled asset, (property of the German state – before Tsipras came along, whoever knew you could actually buy a country?) and fiscal unity seems to claim exponentially more of Draghi’s seemingly infinite life-line. The EU may just survive Brexit and is determined to do so; it may even survive another shock like Brexit (should we call that Catalonia?), but it won’t be able to avoid a third shock.

DONKEY

Nothing is written in stone. The will of ‘the people’ might change and a second referendum, whether Blair proposes it or not, may become a political necessity given the weight of the UK in the global political arena. However, rather than turn around and backtrack, we should be further convinced that the outcome of the referendum was the right one. If the EU buries it’s multi-headed self in the sand and refuses to acknowledge that we didn’t leave on a whim, let the olds have it; the olds have it.