The Labour case for Brexit

You would be hard pressed to deduce this from the current political mood music but, like the Conservatives, the Labour Party has always had a pretty ambivalent attitude to the EU. That much is at least self evident if one looks back at the history of the party and how it split over the 1975 EEC referendum. The main difference though between the two parties is that the things Labour likes about the EU (the Social Chapter, protection of human rights etc.) tend to be the things the Tories hate, and vice versa. What is therefore surprising is that there is not the same debate about the EU in the Labour Party this time around as there was in 1975. My view is that there should be because the potential threats posed to our democracy and to the viability and effectiveness of any future Labour government by the EU (at least in its current form and with its current direction of travel) are now much greater than they have ever been.

These threats I believe are two-fold. The first is economic, the second democratic. The economic threat comes from the increasingly unviable state of national finances and taxation frameworks and the negative impact on both of these posed by the single market. For a government to function effectively it needs to be able to borrow what it needs when it needs, and it needs to be able to tax who and what it needs in a similar vein. This is because taxation is not just a means of raising revenue to fund services: it is also a macroeconomic tool that should be used in conjunction with borrowing to correct imbalances within the economy and thereby promote economic stability. Yet even outside the euro this will become increasingly hard as the EU becomes more integrated and the single market becomes all-powerful and all-consuming.

This is because at the heart of the new EU is the single market. The single market is everything. The single market is sacrosanct. Nothing will be allowed to interfere with the single market. That means all government policies will be tested against this question: do they distort the single market? If so then they will be deemed to be illegal. We have already seen the start of this trend with the decision of the European Court of Justice (ECJ) to vote against minimum pricing of alcohol in Scotland. Next it will be differences in excise duty that come under the spotlight, then VAT. After that it will be corporation tax on companies, and possibly even income tax. But you don't need the single market or the ECJ to bring about harmonisation of tax rates: that will happen automatically if we continue to allow the freedom of movement of people.

The freedom of movement of people or workers is one of the four pillars of the single market, the other three being the freedom of movement of capital, goods and services. Implicit in these is a fifth freedom, the freedom of movement of jobs. Most criticism of the first of these, the freedom of movement of people, has concentrated on its effect of immigration. However, there is a secondary impact. If you allow people to move country then you effectively allow them to choose which taxation regime they wish to work under. In other words they are able to exercise consumer choice to choose their tax rate by selecting a country of residence with as low a tax rate as possible.

We have already seen the effect of this when President Hollande raised the top rate of income tax in France to 75%. Many of the wealthy moved to London or across the border into Belgium, Luxembourg, Germany or Switzerland, and then commuted back to France for their work if they needed to. Of course if your income tax was dictated by your nationality and not your country of residence (as is the case for US citizens) such movements would not be financially beneficial, but of course EU rules and the single market prevent this.

The impact of all this will be two-fold. Firstly it will undermine democracy because it will effectively allow some voters to circumvent the democratic outcome of national elections. If you don't like the result then you can just move somewhere else. If your fellow countrymen vote for a socialist government with better public services and higher taxes on the wealthy, then the wealthy can just move to a country with lower taxes. The rich get to have their cake and eat it.

The second impact is a direct consequence of the first. If the voters can move from country to country in search of the best tax deal, then countries will be forced to compete for income. This competition will force them to outbid each other in terms of tax cuts. The net result will be an inevitable race to the bottom in terms of tax rates. As a consequence the tax gap that governments currently suffer from will widen, revenues will fall, spending will decline, and services will worsen, whether these are in social security, healthcare or education.

The one great virtue of the EU in the eyes of Labour voters and trades unionists has always been the Social Chapter of the Maastricht Treaty. This encapsulated the core ideal that the EU should be for the benefit of workers, and not the owners of capital, by setting common standards for working rights and conditions that multinational corporations in particular operating in the EU would have to abide by. The rationale was that individual member states were too small and powerless to implement these standards unilaterally because multinationals could effectively force nations to compete against each other for the jobs those multinationals could provide. The irony now is that it is competition within the single market that is the great threat, not to wages but to government finances. Once you allow freedom of movement of labour then you undermine the fiscal sovereignty of individual states. Eventually they become financially non-viable with only the EU itself being able to levy income tax across the EU and across national borders. The result will be a push towards introducing a federal income tax and a federal budget with more loss of sovereignty and democracy at national level.

The result of all this is that it will become virtually impossible to elect a left wing government because a left wing government by definition is one that will always want to intervene in the market, either to prevent economic crisis or to stabilise an economy that is already in crisis, or to reduce the impact of inequality. All these interventions will necessarily result in a distortion of the market, and even though the market is imperfect and may be in crisis, this will be deemed to be against the rules of the single market. So while you may still be able to vote for a left wing government, that government will not be allowed to implement anything that resembles a socialist platform. It will be like voting for a Labour local council but finding that they still have to implement the same austerity-driven cuts as would have happened under a Tory administration. And of course the Greeks have already discovered this. They elected Syriza (twice) and still ended up with their economy being run by Dr. Strangelove in Berlin.

To put this into perspective imagine some of the policies that a future Labour government might wish to implement to raise extra taxes and tackle wealth inequality: the mansion tax; a citizen's income, support of key industries (e.g. steel) in times of external shocks; taxes and controls on intellectual property. All of these could be at risk from EU rules and regulation. The citizen's income (or basic universal income) in particular is one idea that is gaining support across the continent. The Swiss are currently voting in a referendum on this issue, but one concern is that the freedom of movement of people would make it unworkable whereas if eligibility were based on nationality then immigration would have little or no negative impact. But under EU rules countries are not allowed to "discriminate" on grounds of nationality.

The worrying thing is that the current Labour hierarchy seem oblivious to most of these potential pitfalls of EU membership. Moreover, by hitching his wagon (and by association most of the Labour Party) to the Remain campaign, Jeremy Corbyn has made a massive tactical miscalculation. If the electorate votes to leave them he will have made Labour unelectable for a generation as no-one will trust the party in government to keep the UK out of the EU. After all who is going to vote for a pro-EU party and prime minister if the country is negotiating to leave the EU? At least if a significant number of senior Labour figures (other than the commendable Frank Field and Gisela Stewart) had signed up to the Leave campaign then there would be sufficient alternative leadership candidates, or cabinet members who could be entrusted to lead future negotiations. And even if the public votes to stay in the EU the Labour party will likely lose significant votes to UKIP in future elections as a result. It is an outcome Frank Field has warned about but no-one seems to be listening.

Football economics part 1: transfer fees

This weekend is the start of the Premier League football season. Hooray! Or maybe not? As a football fan even I am becoming disenchanted by the role money plays in the game today, the effect it has on motivating or de-motivating players, and the contribution it makes to the financial instability of clubs of all sizes. So perhaps it is time we started asking if the economics of football can be redesigned, and we could start with that most topical of issues: transfer fees. 

The last few weeks have seen the sports pages of our national newspapers monopolized by speculation over the future of players like Luis Suarez, Cesc Fabregas, Gareth Bale and Wayne Rooney. Of particular interest has been the £40m clause in the contract of Luis Suarez which bares a certain similarity to the buy-out clauses that often feature in the contracts of players at European clubs. These clauses are supposed to represent the amount any other club would need to pay to acquire that player, except that the buy-out clause is hardly ever enforced, and when the player does move clubs it is usually for a much smaller fee. 

Of course the Suarez clause isn't technically a buyout clause, so at the time of writing Suarez is still a Liverpool player, and in theory there is nothing that any bidding club or Luis Suarez can do to change that situation. But as we have seen in the past, if the bid is large enough then the club will sell irrespective of the wishes of the player, and if the player demands a move strongly enough then he usually gets his wish irrespective of the wishes of his current club. The result is a system that suits no-one, that is opaque and arbitrary, and which appears vulnerable to external manipulation and corporate bullying. 

The current system is therefore clearly dis-functional. The contracts often appear to be meaningless, particularly to supporters who expect total loyalty of the player to the club and the contract. However those same supporters are less exercised when it comes to selling players that the club no longer wants. And when it comes to the players themselves there is an equal degree of hypocrisy. Players have temporary fixed-term employment contracts that they expect to be honoured in full if they suffer an injury, but which many try to break if they see a better opportunity elsewhere. 

So is there a better way for players to be exchanged between clubs? I think there is. As money is the facilitator of such actions then the answer must lie in the economics of the transfer process. At the centre of any transfer policy must be the market value of the player, or his marginal utility. It is fairly easy to calculate what this should be. It will be determined by the player's salary and his length of contract. At any given time an employee's wage is supposedly (in neoclassical theory) determined by the company's gain in net revenue that results from his employment. Therefore his annual value to the company is determined by his salary. His total value over time will be set by the expected duration of his working life at that club and his average annual salary over that time period. For a footballer his expected working life at his current salary is set by the length of his contract. Risk of injury, age and loss of form are all factored into the contract length. Therefore the total marginal utility of the player is set by his current salary multiplied by the time left on his contract. 

The advantage of this formula is that everyone would know where they stand. The player and his current club would know that if a rival club were to bid more than the product of the player's current salary and the remainder of his contract then the player can move. His current club would know that if they wish to ward off such rival bids then they must offer the player either a longer contract, or a higher salary. And everyone would know that the closer that a player gets to the end of his contract the less his transfer fee will be. In that sense this idea merely formalizes the situation that already operates in practice where players with only one or two years left on their contract start to see their transfer value decline. 

The net result of such a change would be that transfer fees would probably fall and players' wages probably rise, with the wages of the very top players being most affected. Whether that is good or bad depends on your perspective (I will deal with the question of clubs' income and player salaries in another post), but it would mean that transfers of players would be smoother with the player's current club being unable to block such moves with outrageous demands over transfer fees. (Is Gareth Bale really worth £100m, or Suarez worth more than £40m?) In return though, the selling club would be guaranteed a fair fee. It would also mean that the most valuable players would move to the teams where they would have the greatest marginal utility. But more importantly it would rid football of the current tug-of-love fiascos that are played out in the media between players and competing clubs, as well as the tapping up of players, and all the other mechanisms by which clubs, journalists and agents seek to unsettle players in order to force a move, often at below the market rate.

Loony policy proposal No. 1 - 200 GBP visas to deter use of NHS

Have we reached the silly season already? It seems like it with this proposal. 

Political parties are rarely any good at coming up with workable policies when they are in office, but then again they don't seem to be much better at it when they are out of office either. And when it comes to the design of inept policies they don't get much wackier than this one. It therefore seems entirely apposite to start a new series of articles highlighting such political ineptitude and fuzzy logic with this real corker of an idea. 

The ConDem coalition's latest big idea is to charge all overseas non-EU visitors an extra £200 for their visas in exchange for the right to use the NHS when they are here in the UK. The alleged reason for this policy is to counter so-called health tourism where overseas migrants come to the UK to use our NHS but then avoid paying for the treatment they get. The first question, therefore, is will this policy work? Will it deter people from coming to the UK just to use our health service for free? 

The answer to this is clearly no. Charging foreigners £200 pounds is going to be no deterrent when the potential benefits are health costs that could be a hundred or a thousand times greater. In fact £200 is even barely significant when compared to many international air fares. So where is the actual deterrent? In fact you could argue (and Richard Murphy does) that the new policy could actually increase the scale of the problem by legitimizing it. That, however, is not the only massive flaw in this policy. 

The second question is does it result in any adverse or negative consequences? The answer here is clearly yes. In effect the proposal is to levy a tariff on all foreign visitors in order to pay for a minority that might abuse the NHS system. But that means that the majority will be punished for the actions of a minority, and as the majority are free to avoid the tariff by simply travelling to another country, the result is likely to be a substantial fall in students and tourist numbers entering or visiting the UK. So not only does the policy not deter the people it is supposed to, it instead actively deters the people we want and need to come here to boost our economy. 

The third test of any policy should be, do the benefits outweigh the costs? The answer here is also clearly negative, as the results of the first two tests do not even begin to compensate for each other. They are clearly both additive and negative. So the sum of the two effects in massively negative. 

The fourth question any new policy needs to address is, do we need it? Well in the case of health tourism no-one really knows how big this problem is. It may cost the country £12m a year or it may be £200m, but either way it is still insignificant in comparison to the size of an NHS budget of £109bn. So this policy clearly fails the fourth test of any workable policy - necessity. 

So what we have is a policy that we don't need (yet), that will fail to deter the people it is designed to deter, that will instead deter the overseas visitors we want and need, and may in fact even encourage the problem of health tourism to grow further by legitimizing it. It really does take a phenomenal degree of incompetence to invent a policy that is quite that useless and counterproductive.