Wednesday, May 27, 2009

Hari on Cameron, again...

Ah, Johann Hari. I've missed him. It seems like only yesterday he was writing lame attack pieces about David Cameron (it might surprise you to hear this; but did you know that David Cameron was personally wealthy? Horrific huh?). And now, here he is, writing, um, lame attack pieces about David Cameron. And, as ever, marvellously wrong in almost every particular. A long post this, I'm afraid, but hey, when someone is so wrong so often, it takes a bit of documenting.

Let's start with a tiny story, that points to a bigger untold tale. A few days ago, the Leader of the Opposition was asked how many homes he owns. "I own a house in North Kensington and... in the constituency in Oxfordshire and that is, as far as I know, all I have," he said. He then started to get confused, said he might own four homes after all, and pleaded: "Do not make me sound like a prat for not knowing how many houses I've got." Imagine if Neil Kinnock said this in 1991. Do you think you might have heard?

Indeed so hidden away, practically unreported really, was this teeny, tiny story that it was in the lead piece in the Saturday Times magazine. Hidden in plain sight, you might say. Interestingly, the full quote gives a slightly different impression to Hari's interpretation:

So how many properties do you own? "I own a house in North Kensington which you've been to and my house in the constituency in Oxfordshire and that is, as far as I know, all I have."

A house in Cornwall? "No, that is, Samantha used to have a timeshare in South Devon but she doesn't any more." And there isn't a fourth? I don't think so, not that I can think of." Please don't say, "Not that I can think of... You might be... Samantha owns a field in Scunthorpe but she doesn't own a house"

Incidentally, odd ellipses in Hari's piece aren't they? Inaccurate for one thing, and to leave out the words "my house" is a bit weird.

Anyway, on to more serious stuff. And it's a warm welcome to the great Inheritance Tax disingenuousness.

He is committed to spending billions on a massive tax cut for the richest inheritees, paid for by the bottom 94% of us.

Three billions that is, except probably less now given that house prices have been dropping so precipitately. And the whole 6% figure for IHT is a sham, as I've gone into again and again.

Although currently only about 6% of estates are hit by Inheritance Tax, this is irrelevant. In the 'hit by a bus' scenario that has to drive personal tax planning in this field, about 34% of the population would be caught by Inheritance Tax. Saying, 'don't worry, by the time you're likely to die, you won't have as much money' isn't terribly reassuring. IHT raises comparatively little money at the cost of a lot of heartache and complex financial planning. Abolishing it would not merely benefit the elderly in immediate contemplation of bequeathing their estates, but also the healthy who are not inclined to leave it to luck that they don't walk under a taxi on the way to work.

What's next?

Although you wouldn't know it David Cameron's economic philosophy was already surprisingly far outside the political mainstream before his latest revelation. Cameron is almost alone in the democratic world in disagreeing [with the need to increase public spending in a recession] and demanding immediate cuts in public spending as the global economy grinds to a halt. When I asked this year's Nobel Prize-winning economist Paul Krugman whether this would make the recession worse, he replied: "Yes. For sure," and then added that Cameron's policies were "pure Herbert Hoover."

So, following Hari's argument to its logical conclusion, the Government ought to be substantially increasing public spending, above and beyond the traditional automatic stabilisers, and funding it all through increased borrowing. Which is, after all, pretty much what the current Government is doing. But the problem with this policy is that Britain's public finances are already stretched to the limit. As I mentioned yesterday, Standard & Poor's are teetering on the brink of downgrading our sovereign debt. If that happens, the cost of borrowing (otherwise known as interest rates) will have to rise significantly, or there will be massively high inflation – or both. Then we really will be in an excrement/ventilation interface incident. What's next?

He was asked about whether the government's proposals to increase taxes on the richest one percent would raise more money for the Treasury. He replied: "It's a very difficult calculation about where we are on the Laffer Curve... We have to put this [top rate of tax] in a queue of things we would want to get rid of... and I'm always interested in topping up my study of Laffer" To most people, this sounds like gibberish. Who is this "Laffer" who Cameron is turning to as the measure of whether tax policy works?

Is Art Laffer really so obscure?

Arthur Laffer is an economist who was fired from the Nixon administration in disgrace and went on to invent a false economic theory. He was picked out by the Watergate-wet Richard Nixon when he made a prediction about economic growth that was way ahead of every other economist. Nixon put it into every speech - until it was revealed that, while other economists had used thousands of variables to arrived at their predictions, Laffer had used just four - and got it totally wrong. He was fired, and that should have been the end of him.

Uh-oh

At the University of Chicago Laffer impressed George Schultz, head of the School of Business, and when Schultz went to Washington to run the Office of Management and Budget in 1970, he took Laffer along as his assistant. The next year, as the brashest of whiz kids in the Nixon administration, Laffer made headlines rosily predicting a GNP of $1,065 billion - a forecast his fellow economists found hilarious. The GNP did in fact rise to $1,063.4 billion, if only briefly, proving that Laffer was a prophet with some honor.

Hmm, not picked out by Nixon, and didn't get his prediction totally wrong. If getting things wrong meant the end of careers, Hari's would have been remarkably brief. Anyway, the Laffer curve as a concept is both simple and obvious - the relation between tax rate and tax take isn't a straight line. At some levels, tax rises will reduce revenue and tax cuts will raise it. Or, as Hari sees it:

It was a magic formula - you can cut taxes for the rich and you won't lose a penny in tax revenues! There's no business cycle - only marginal tax rates make the economic weather. There's just one problem. It's a fantasy. Look at the facts in Laffer's own country. From 1947 to 1964, the top rate of tax in the US was 91 percent. Using the Laffer Curve, the economy should have been in the tank - but in fact it was enjoying the longest sustained boom of the twentieth century. In the 1980s, Reagan slashed the top rate - but there was a severe recession in 1982, and the growth that followed was merely an average recovery. Then in 1993, Clinton increased the top rate of tax from 31 to 39.6%, and Laffer predicted an economic collapse. In fact, there was the next long boom.

Hari presumably hasn't read the US Congress's Joint Economic Committee's review of the Reagan tax cuts, so I'll just summarise them for him.

Since 1984 the JEC has provided factual information about the impact of the tax cuts of the 1980s. For example, for many years the JEC has published IRS data on federal tax payments of the top 1 percent, top 5 percent, top 10 percent, and other taxpayers. These data show that after the high marginal tax rates of 1981 were cut, tax payments and the share of the tax burden borne by the top 1 percent climbed sharply. For example, in 1981 the top 1 percent paid 17.6 percent of all personal income taxes, but by 1988 their share had jumped to 27.5 percent, a 10 percentage point increase…individual income tax revenues rose from $244 billion in 1980 to $446 billion in 1989.

Or I suppose we could ask the IFS about Browns proposed 50% rate. But facts are less fun than personalities aren't they?

(Remember: this is a man who said his wife is "highly unconventional" because "she went to a day school"

Can anyone find the source of this anywhere? Google provides no joy at all, except for a link to Hari's own article, but surely he wouldn't just have made this quote up would he? Seems unlikely, but there it is. Lets finish with a line that sums up Hari's writing perfectly.

As one political journalist recently said sardonically that if Cameron announced the slaying of the first born, he would be applauded for having a great policy for second children.

Ungrammatical, unpleasant, unsourced. That's our Johann.

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