Taxing the rich is fairer than imposing austerity on the poor

Posted in : - Blog -, Britain's Economic Policy on by : petersen Comments: 1


Two hundred years ago, Britain owned and ran the largest empire the world had ever known, and was the “workshop of the world” –the richest country in the world, the world’s first major manufacturing nation making more manufactured goods than any other country. But Britain is now  the ninth largest manufacturing nation in the world. It is about the twenty second richest country  of the world in terms of average income per head, and  accounts for less than one per cent of the world’s total population of seven billion.

Britain has had a remarkable history, but can now be regarded as one among many European nations struggling to make a living in a world in which there are several nations which are much larger and more powerful in several respects. For example, the United States and China are now by far the largest manufacturing nations. China and India between them have populations of two and a half billions.  India and China  still include large numbers of extremely poor people – but between them they also have something like ten times as many people living at higher material standards of living than the average in Britain.   A substantial proportion of  the British workforce, about 8 percent – about two and a half million people, are unemployed, and a higher proportion of young people – about a million – 20 percent – are unemployed. The chances of the sons, daughters and grandchildren of coal miners, clothing  workers and car workers being unemployed are relatively high now largely as a consequence  of regional, national and international trends. The times when Marks and Spencers used to boast that 99 percent later 90 percent of the clothing they  sell  was made in Britain have long gone.  The jobs of making that clothing have shifted  to other countries such as China, India, Bangladesh, and  Vietnam. People there who are paid far less than clothing workers were in Britain often work for very low wages in appalling conditions.

In Britain we benefit from being able to buy reasonably good clothing at very low prices. Similar trends also affect motor cars and their production, but Germany with  its excellent  education training system and management  has largely replaced Britain in world markets for motor cars. Such motor car manufacturing as survives in Britain – which is by no means negligible – is owned and directed by Corporations with headquarters in other countries.

Increasing numbers of products which used to be made in the UK are now made in developing countries, especially in Asian countries such as China, India and Bangladesh. Many of the people who manufacture such products are very poor and work in appalling opmetimes unsafe conditions. Some poor countries became prosperous by making ever more sophisticated products. After the Second World War, Japan rose to prominence as a manufacturer of radio, TVs, cars semiconductors, and of other new domestic electronic products based on them. Some previously poor countries such as Singapore, South Korea and Taiwan subsequently became prosperous as manufacturers of consumer electronics, and such manufacturing has now spread to India and China.

At the end of the Second World War, motor manufacturing was virtually confined to rich developed countries such as the United States, France , Germany and Britain. Now India and China as well as Japan manufacture  millions of motor vehicles. Germany has succeeded in remaining a far more important manufacturer of sophisticated goods such as fancy motor car and electric locomotives than Britain largely because of their more than a hundred years’ success story of educating and training excellent engineering managers,  professional engineers, technicians and other skilled workers. Britain’s early amazing success  in becoming the workshop of the world was not based on science and technology, but on craft skills. Britain remains very successful in terms of science, but not so good at technology. In terms of manufactured goods, Britain has remained successful in pharmaceuticals, as well as more successful in military rather than civil technology. At the beginning of the twentieth century, the United States became the most successful country in terms of mass producing motor cars and other products.  Indeed, from the early nineteenth century, America  pioneered such technologies as interchangeable parts which were crucial to mass production, while Britain retained the lead in production of steam locomotives which was basically craft production. For several years after the Second World War , Britain retained significant capabilities in relation to civil aircraft – based on pioneering military aircraft, and jet engines in the 1930s. Indeed , some such manufacturing is still significant in Britain , with Rolls –Royce continuing to make substantial quantities of jet engines and other  British companies participating in the European Aerospatiale project making airliners. A Government report which is rather too optimistic  in several respects says: “Low wage economies tend to specialise in relatively high volume / low technology manufacturing sectors such as clothing while the UK is relatively specialised in knowledge intensive sectors such as business services and pharmaceuticals. This suggests the UK should be well placed in the near term to weather some of the competition from emerging economies, though in time emerging economies could become more competitive in knowledge intensive sectors.” 

A major component of business services, is banking services  in which Britain has a very strong export position. The present Government led by Conservatives is anxious to preserve the dominance of banking for very good reasons.  A study by the Bureau for Investigative Journalism found that the City accounted for  more than 50 percent of the funding of the Conservatives  in 2010, a general election year . Conservatives  would claim that this dominance works for the benefit of British people in general. But there are good reasons to doubt whether  much of the financial benefits spread beyond a small coterie of very rich bankers and financial speculators. Margaret Thatcher and Ronald Reagan initiated widespread deregulation of banking which exacerbated the tendencies of bankers to speculate. The subsequent  Labour Government led by Gordon Brown did nothing to restrain bank speculation – indeed encouraged it. This eventually. was a  major  cause of  the worldwide recession from which millions of much poorer  people are  now suffering. So it is not surprising that the British Government resists European proposals for regulating banking and for taxes on banking transactions, because  the Conservative Party relies on bankers for a high proportion of its funding.  Barclays has been colluding with many other banks  manipulating the Libor, the main interest rate upon which most other interest rates and financial transactions are based, since 2005., so that they could all profit from  it.  HSBC, which has had to pay a huge fine, is  only one of at least 12 banks now known to have tolerated, and in some cases aggressively courted, money laundering by rogue states, terrorist organizations, corrupt dictators, and major drug cartels over the last decade Several banks created special handbooks on how to evade surveillance, created special business units to handle money laundering, and actively suppressed whistleblowers who warned of drug cartel activities.Visa and Mastercard have agreed to pay  $7 billion to settle a private antitrust case filed by thousands of merchants, who alleged that they  colluded to fix fees and terms of service. So it is about as sensible for a British government to rely on banking in the future continuing  as a major pillar of the economy as it would be for an Italian Government to rely heavily on the Mafia for Italy’s future prosperity. It is far more important to co-operate internationally to try to ensure that bankers  are  restrained from destabilising the world economy once again.

The  British government should cooperate internationally to stop multinational corporations from using tax havens to hide their  profits, to get them to pay higher wages, and  to secure taxes on bank transactions. The idea that tiny Britain can do much on its own about such big issues is ludicrous, just  as is the idea that Britain’s  nuclear weapons can have any significant  influence on the world scene. In terms of manufacturing, which still accounts for about 2 million jobs in Britain, Britain will surely continue to lose out in terms of employment  to cheap products made by cheap labour working in terrible conditions in  poor countries; and to sophisticated products made in countries such as Germany, the United States and Japan who train more and better engineers and managers than does Britain. But the USA, Germany and Japan as well as Britain also face ever increasing competition from poor countries who can now make ever more sophisticated products themselves , such as motor cars being made in China and airrraft in Brazil. Britain cannot afford to lose manufacturing jobs and output if only because manufacturing still accounts for nearly half our exports. We have to continue to  manufacture and export in order to continue to pay for all those cheap clothes and expensive Mercedes and BMWs we import.

Thirty years ago , it was widely believed that the main  problem of British manufacturing was its workers who were better at striking than at working. Subsequent events have proved that to be nonsense. British workers who worked in companies such as Austin, Morris, Standard-Triumph  (later British Leyland) and the Rootes Group were poorly managed, partly because such companies employed inadequate numbers of well educated and trained professional engineers. Now those workers’ children and grandchildren work for  Nissan, Honda, Toyota and BMW who make so called Minis near Oxford , and for the Indian company Tata making Jaguars. Those workers are now producing high quality cars in Britain.  

The Keynesian approach in  times of high unemployment  is to  increase  government spending because creating jobs through economic growth is the best way to reduce  public deficits and debt. More people in jobs result in higher tax revenue and lower spending on social security, the opposite of the effects of austerity. Austerity is even more counter productive  if a country’s trading partners are inflicting the same pain. Europe, from Portugal to Ireland and Greece, provides  evidence against austerity, especially in  the eurozone countries. The terms imposed on Greece as part of its rescue packages included such fierce spending cuts and tax increases that they have made the country almost ungovernable while ruining its economy – Greece’s national income  and especially manufacturing  have fallen sharply and unemployment is over  20%. At the same time, austerity policies have destroyed government finances. Greece’s ratio of government debt to national income soared. In Britain, there is plenty of scope for creating useful employment in housing –especially of social housing which has fallen enormously since thousands of council houses were sold  by Margaret Thatcher so as to increase the Conservative vote. With an ageing population, the need for social care has risen enormously and the scope for increasing social care is correspondingly enormous.  

Rather than there being no alternative to cutting Government and Local Authority expenditure, such a policy is insane. Putting the unemployed to work  has to be paid for and much  of it has to be paid for out of public expenditure –municipal as well as national. But this is worth doing when the alternative is to waste the talents and skills of a significant proportion of a  generation of young people.

Public expenditure has to be paid for  out of taxation. The major political parties compete with each other to claim they will lower taxes the most. But if taxes o on rich people are increased  people will have less money to spend  because they have to pay more in taxation, so  they can afford to pay for lower quantities of mainly imported luxuries. This would not be a tragedy. And when the millions of unemployed get to work, the taxes they pay will come back to government to refund the intial costs of employing them.  But if governments do not act strongly to reduce unemployment –and especially youth unemployment –  wasting the talents and skills of a generation will  be a tragedy. It is, of course, ridiculous  to spend huge amounts of money  on teaching  people how to be better at getting jobs when  there are too few jobs available.

One thought on “Taxing the rich is fairer than imposing austerity on the poor”

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