Avoiding default is non-negotiable aim – FT.com

The Tea Party Goes to Washington

The Tea Party Goes to Washington (Photo credit: Wikipedia)

This is an outstanding editorial from the FT.

via Avoiding default is non-negotiable aim – FT.com.

Let’s hope common sense prevails soon.

This leads me to an interesting open question:

Are the Tea Party likely to destroy the Republican Party?

Any thoughts?

 

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Dr Alf’s Reflections – ‘Dutch sandwich’ grows as Google shifts €8.8bn to Bermuda ex FT.com –

English: A chart demonstrating increases in th...

English: A chart demonstrating increases in the annual income of the top 1% of wealthy persons in the U.S. before economic crises. (Photo credit: Wikipedia)

English: Banks Furious As Shares Tumble, Eveni...

English: Banks Furious As Shares Tumble, Evening Standard, London, UK, 7 October 2008 (Photo credit: Wikipedia)

As John Gelmini highlighted, I have just had three days offline, hiking in Northern Cyprus. On Friday, when I returned to my blog, on Friday, I had to reblog the FT’s powerful, top story entitled ‘Dutch sandwich’ grows as Google shifts €8.8bn to Bermuda – FT.com; I added my two cents to the story and raised a couple of open questions about multi-national tax evasion, austerity and the Republicans’ triggering a global crisis because of the ceiling on US Government debt. As usual, John Gelmini made some powerful arguments and challenged me to focus on evidence in the UK.

Following my few days in the fresh air, my mind was racing, with different aspects of this story. However, I was also deeply influenced and disturbed by another thread on which I blogged on Friday. I had also reblogged leading Oxford economist, Simon Wren-Lewis’ blog entitled “Why I am obsessed by austerity – Simon Wren-Lewis – Mainly Macro“. Once again, I added my views on the story, and asked an open question about stimulating economic growth in the UK with evidenced-based policy instead of the ideologically based policies ( so prevalent in David Cameron’s Government).

After this lengthy introduction, let me try to distill a few threads.

Let’s take a simple historical perspective and chart the emerging story. Prior to the financial crisis of 2008, there were many well established Western-based multi-nationals. These  companies had powerful global brands, strong balance sheets, access to the lowest cost finance, established lobbying positions with governments and international organizations, For decades, these companies had moved resources offshore to the countries with the lowest costs of labor to maximize their profits. When the multi-nationals were challenged about their contribution to society if they moved lower skilled jobs off-shore; they responded powerfully that they were leading the way with investment in new technology and new products on a massive scale. So prior to 2008, the multi-nationals were the good guys? Well not exactly because although the multi-nationals made enormous profits they managed to quite legally evade taxes by shifting their global profits to low tax countries.

Let us return to the financial crisis of 2008 which was caused by deregulation of financial markets in the US and greed leading to unscrupulous selling of questionable financial products and sub-prime loans to the poorer members of society. In 2008, governments and central banks responded with massive bailouts of banks, and in the US whole industries like the auto sector, causing high levers of debt, especially in the UK. Following the crisis intervention, the austerians came to power in Washington, London and Berlin, favored short-term austerity to bring down debt levels. The axe fell heavily on national and local government. Economic pressure held labor costs down, and with rising inflation the middle and working classes suffered a serious cut in living standards. Whilst matters have been bad in both the UK and the US, austerity has caused enormous economic and social damage across most of Southern Europe.

Returning to the multi-nationals, following the 2008 financial crisis, they typically built up mountains of cash, choosing to cut-back investment in technology and products, responding to surplus capacity. The multi-nationals often had very tight labor policies with strict central controls on hiring new labor. So the multi-nationals were just battening down the hatches ahead of an economic storm?   Unfortunately, by the multi-nationals looking after their own interests, other parts of society had to suffer disproportionately, especially the middle and working classes.

Because of austerity, there has been greater focus on the effectiveness of tax collection and a crackdown on tax evasion which is illegal. Meanwhile, very wealthy individuals and multi-nationals can employ top tax consultants and quite legally avoid paying their share of taxes; they argue that they are doing nothing wrong.

As John Gelmini highlights David Cameron’s government has made a show of tightening taxation of multi-nationals; this has gained attention at G8.  Personally, I think that the political leaders and their sponsors are probably too close to the interests of the multi-nationals to be effective on taxation; the lobby is just too powerful. In the US, a minority in the Republican Party is effectively able to hold the US and the global economic system to ransom. Meanwhile, in the UK, George Osborne continues to ignore evidence-based policy, in favor of ideological-based policy. With a national election coming in under two years the Government is keen to brainwash the public, with a feel-good factor on the back of government guarantees for home loans fueling house-price inflation.  Real economic issues like investment, jobs, skills and immigration are sidelined, with the focus on winning the election by negative campaigning.

To conclude, we have seen an enormous polarization of society since the financial collapse of 2008, with the super wealthy top 1% and the multi-nationals coming out clear winners. The great unwashed, the 99% continue to suffer from the impact of austerity. We shall soon see how this is turned into election promises in the UK.

Let me conclude with an open question:

Do you think that the middle classes will ever be the same post 2008?

Any thoughts?

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