A Thought Piece on Change

Tired of writing stuff on the on going Brexit saga, it is time to turn the spotlight on to other and more important matters that will impact not just Britain but the whole of the global economy though Brexit will leave the UK better placed to deal with them. I have written on a number of previous occasions concerning the “Future Economy”

The key issue is not whether the global economy will/is changing, it will but how we are going to manage that change whilst maintaining a high degree of global prosperity. The importance of this cannot be overstated because unless the major economies come together and forge durable agreements between them, the alternative will be the historical one of low level conflict leading to all out war.

Essentially the Political Dimension

Jonathan Guthrie and Dan McCrum from the Financial Times Lex team were doing a piece on the FT YouTube channel upon whether capitalism has got too soft and whether the answer is a return to a more full blooded version of it:

https://www.youtube.com/watch?v=scsItoRLrzg&t=6s

We live in an age where people are looking for answers and solutions but frankly shy away from doing the obvious things that would provide those and rather foolishly try to cling to the nostrums of past times. If you dig down and not very far, you come across the type of “historical confusion” I first met in my childhood when I realised that those who described the reasons for Irish nationalism were judging past events in today’s terms as far as the “norms” of behaviour were concerned. A view of how Irish peasants were treated “by the English !” looses its sting when you realise that English peasants were treated in exactly the same way in those distant days so what we are really looking at is a class rather than a nationalist struggle.

Below is a comment I posted against this YouTube video where I try to express what are quite complex ideas in as simple a way as possible.

“Good thoughts but impractical because we do not have the environment for “proper capitalism” and probably haven’t for over 100 years. This means that we as a society, our elected politicians and businesses must all operate within the mixed capitalist/socialist country that is the UK today and to be fair with variations, is also the same for most of Europe. The appeal of Corbyn and Labour to some, is based on a wish for “something different” but his/their ideas are just as impractical and just as backward looking as a desire for a version of capitalism that is red in tooth and claw.

Consider the following : The UK has a productivity problem and we know that increased productivity, more produced in the same time using the same labour inputs equals a real increase in wealth creation – hooray ! But the best way to do that is by using machines instead of people, not only have people lost their jobs but the government too has lost the taxes they used to pay – boohoo ! Today lots of people complain about “austerity” and no real pay rises but that is because in the UK we have pursued as much employment as possible so people have work but, wages are stagnant.

If we want real wages to grow, we need to find a new path and create a new public/private model for our economy. We need to evolve a new model not just of capitalism but also of socialism because neither alone will fit our current circumstances.”

The main point I’m trying to make is that political stances of whatever kind, a “purer form of capitalism” or “old school Marxist thinking” are both irrelevant because of the complexities of modern economies where change can be a lot more than just mildly disruptive to this company or that whilst the rest all “happily march forward into tomorrow”, this will not happen. The changes we face today have been gathering momentum over the past 50 years or so, they have now reached a crucial stage, the tipping point.

Tax as a Big Example

There are three obvious areas where countries have to take a hard look at and adjust the way they do things both internally and make cross national agreements where appropriate, none are new but now they have reached a critical stage:

Cross border internet trading.

Global companies sheltering profits from tax.

Electric cars.

The first two are obvious candidates for international agreements though how easy they will be to reach and once agreed, what kind of legal enforcement structure can be put in place is a whole other matter but it needs to be done so that each country receives a fair tax revenue from its trading activities both internal and external. Whilst the spectacle of global businesses avoiding paying taxes in the countries where they make their profits and then, keeping it all offshore is a blatant abuse of any concept of being a “good corporate citizen” and should end rapidly.

Carrot and Stick via Taxes

However I am going to focus on the third item from a very British perspective to illustrate the complexities that one fundamental change can bring to society and in this case, electric vehicles.

Governments can and do use a mixture of financial incentives and the “bully pulpit” to change public opinion and therefore the behaviour of citizens concerning things that it considers “undesirable behaviour”. A classic recent case being about getting people to stop smoking tobacco but as tobacco products are highly taxed, that tax revenue has had to be found elsewhere today. Although you can argue that the savings in health care costs over time will be far greater than the lost tax revenue, these projected ‘savings’ will only be seen many decades ahead when the current crop of politicians will be long forgotten and the die hard smokers have died off.

As part of this process, it is important that the “bad behaviour” being targeted is accepted by the public as being totally wrong but there is another and separate issue in that any lost tax revenue must either be hidden in the sense of where it is made up from or, the change in tax target must be seen as virtuous and “fair”. In the UK we have a long history of what are known as “sin taxes” such as those levied on tobacco or alcohol which successive Chancellors have raised fairly frequently, the public grumble but accept it because the activity being targeted is generally accepted as “not good for you”. However if a lot of revenue is raised from one source and a government sets out to change that source in a way that means the “good behaviour” results in a massive loss in tax revenue, things could get tricky.

An Electric Impact

We have such a situation in terms of getting rid of the internal combustion engine and replacing it with electric powered vehicles. Although people who wear their underpants on their head like Donald Trump and his supporters wish to deny it, for the majority of people across the globe, it is acknowledged that burning fossil fuels for energy is now a very bad idea and we need to move away from the ‘carbon economy’ as quickly as we can. From this we have a surge of different designs and implementations ranging from the fully electric to hybrid engines and whilst a consensus on the “best technology” has yet to arrive, every manufacturer is pouring resources into this field so that a leisurely change in technology is giving way to an accelerated one. This is important because whilst a couple of years ago, people were predicting a gradual evolution in the car market with both types of technology coexisting for some years, it increasingly looks as though a tipping point has been reached and change is already upon us.

As to why this sudden acceleration ? There are a number of interlocking reasons which are worth making a note of because of their impact on the rate of change. The USA is a huge landmass but it is relatively sparsely populated in the middle, all the dense population centres are coastal or near enough as in the case of Chicago on the Great Lakes so pollution has never been seen as a major or pressing issue which is why some Americans can get away with being “climate change deniers” but this isn’t so elsewhere.

One of the consequences of China becoming the worlds workshop has been that it has suffered from quite appalling pollution levels but its economy has matured enough so that solving this has become a national priority. On top of this because of single party politics, the government can ‘command’ changes to take place and there will be no NIMBY style push back from industry or individuals in the population. Unlike Trump who can sit on his bottom achieving nothing, blaming everybody else and lying to cover up his failures, President Xi Jinping has to deliver and be seen to deliver because that is the ‘compact’ between the Chinese Communist Party and the Chinese people and atmospheric pollution is all too visible so it must be seen to literally vanish.

On top of this, China is the biggest market for new cars which means that everyone who wants to export to that market has to keep up with what that market demands. In simple terms, it will be China not the USA that will solve the problems and challenges of non fossil fuel transportation and despite the lead created by Tesla, the US will be playing catch up. In Europe with it’s preponderance of luxury motor brands, they are already investing heavily in no carbon model development or else face being excluded from the Chinese market in the very near future.

The UK Tax Generator

Because I don’t go too many places these days, I am still driving my 15 year old Honda Civic and if I were to change it right now, what would I buy to replace it ? It certainly wouldn’t be a diesel car, petrol ? Or would I buy from the currently available electric and hybrids ? Difficult because even the current electric and hybrid cars are “works in progress”, the technology will improve by leaps and bounds over the next 2-3 years so we may well have a massive car scrap program running in only a few years time and this will cost a lot of money.

The key point though that I want to make here is not that we have the new technology all buttoned down right now but what we do have is a market that is seriously moving in that direction already. There are currently financial incentives to get into “green motoring” and once the unit cost of cars declines, these incentives will obviously disappear overnight as will not having to pay Road Tax but this bit is simple, the changes in taxes will be seen as logical and fair. The big one though will be how to replace the taxes generated by fossil fuels where roughly 60% of the pump price per litre is a combination of fuel duty and VAT.

The following quote from The Office for Budget Responsibility paints the picture – http://budgetresponsibility.org.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/fuel-duties/

“Fuel duties are levied on purchases of petrol, diesel and a variety of other fuels. They represent a significant source of revenue for government. In our latest forecast, we expect fuel duty to raise £27.5 billion in 2017-18. That would represent 3.7 per cent of all receipts and is equivalent to £1,000 per household and 1.4 per cent of national income.”

So the real question then arises as to where and how would any government replace this amount of tax in such a way as the general public rather than just motorists, see it as “fair” ? Technical changes will bring many other such challenges in the future.

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