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Theresa May’s Secret Weapon – the UK Economy

by John Brian Shannon | November 29, 2016

Some things are expected, and some things sure aren’t. And one of the things that wasn’t expected even by the most vociferous Brexiteers prior to the June 23 referendum, was the strength of the UK economy.

Gross domestic product (GDP) in current prices of the United Kingdom (UK) from 2010 to 2020 (in billion U.S. dollars)

Britain’s GDP from 2010 to 2020. To view the interactive chart, visit Statista.com

In the run-up to the referendum, Bremainers used the fear of an economic crash in the UK to good effect, lowering support for Brexit from a high of almost 70% down to 52% in the final two weeks of the campaign.

Even so, Britons ‘knowing’ in their hearts there would be high economic costs to exit the EU (because famous Op/Ed journalists told them so) they still voted for more democracy, more sovereignty, and more control over immigration

The latest OECD report, informs us that GDP growth in the UK next year will be a healthy 2% — beating major Western and developing nation economies, and the following year is estimated to be in the 1.5% range. Not bad, considering the doom that was supposed to be upon us and considering that the OECD itself had earlier predicted UK growth to be at 1.5% and 1.2% (at best) over the same two-year period.

Sure, some things need to be carefully navigated. Raising the minimum wage for UK workers over age 25 (called The National Living Wage) could be an additional cost for some employers and could thereby increase the unemployment rate among workers. But it’s an overstatement to say that could happen in a growing economy however, if the economy begins to contract it becomes incrementally more serious.

Something else that bears watching is the fall in the value of the pound — which is seen as a desirable thing by economists as it increases exports in almost every country where currency devaluation has ever occurred — but if it doesn’t happen, a speedy remedy must be found. A falling currency with no appreciable increase in exports has no value at all, and only serves to make foreign goods and foreign travel for Britons, more expensive. Government intervention must therefore be instant and right on target in order to rectify the problem.

The UK economy is largely service based (due to the historical high valuation of the British pound) and with a falling pound manufacturing exports should rise in tandem with the falling currency (with plenty of lag time, as it isn’t an instant process) yet if it carries on for too many months, government must intervene to help exporters.

Help is not ‘help’ unless it is actually help.

Providing the right kind of assistance to British manufacturers is key here. There’s no use having the international trade office providing help to access foreign markets if transportation bottlenecks are the problem! Likewise, if limited access to rare-earth metals is the thing restricting manufacturers, lowering the corporate tax rate won’t help.

It’s about listening carefully to the needs of exporters

It’s about meeting every manufacturing CEO and giving them a full and fair hearing in regards to their corporate needs. And then, solving the problems surrounding their inability to export in huge volumes.

It’s doubtful that a one-size-fits-all solution is going to work in Britain’s case. It’s likely that a range of issues need to be addressed. Certainly, companies have a different challenges. For example, some have never exported railway steel (due to the historically high pound) while others that export designer clothing (the high pound just isn’t a factor in this particular market) but face competition from nations which allow ‘knock-offs’ of Britain’s famous clothing brands.

In previous decades, governments threw money at corporations or give them massive tax breaks to allow them to take care of the problems, themselves. But those days are past.

In our time, governments simply don’t have multi-billions to hand to industry as the massive economic growth that was a consequence of massive population increases (courtesy of the baby-boom generation) are long past — and massive corporate tax breaks just aren’t possible as the present corporate tax rates can only be termed ‘marginal’ compared to the ‘heavy’ corporate tax rates of the 1950’s – 1990’s.

All of this means that the British government must begin to see UK companies as ‘part of the solution’ to Britain’s economic future as opposed to ‘part of the problem’ — which is how the corporate world was viewed by government in the pre-2000 era.

High growth is a wonderful thing for senior executives, it’s a great thing for a sitting government, but it means the people in the bottom-three quintiles face ever-lower wages, more unemployment, resulting in a lowered standard of living for those citizens. And let’s not forget, lower standards of living directly and always equate to higher healthcare costs so there’s no savings anyway. At least, not for governments or families.

While the days of fixing everything with one silver bullet are over, there is still plenty the UK government can do to boost GDP; By assisting manufacturers to re-learn how to export and find new markets, helping industry to boost productivity by redirecting education towards the always changing needs of industry, by providing additional R&D tax breaks for companies — and to provide decent jobs for those left behind via massive and ongoing infrastructure spending programmes, rather than have them rely on eternal government support.

It’s clear that Building a Better Britain begins and ends with Building a Better Economy

Therefore, as important as every other matter before government is (including Brexit!) it’s all for naught if the economy begins to fail, because when the economy fails, so does industry, society, and governments, which tend to fall… hard. Just ask any former politician.

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Choosing Triumph or Tragedy for Britain’s Economy

by John Brian Shannon | November 21, 2016

In this new century every country has its challenges. And these days, even advanced nations like Britain are challenged to balance the books while still providing the services that citizens depend on, and international partners expect.

No Worries. It’s easy as pie!

But we’ll get to the pie charts later. For now, let’s sketch out some broad outlines that a vast majority of people probably agree on.

And number one on the list must be that rich countries shouldn’t be running budget deficits. Ever. With the possible exception of major national emergencies or God-forbid, another World War. Other than those caveats, there is simply no excuse good enough that G7 nations should be running budget deficits. Full stop.

Ours is the most advanced civilization the world has ever known, we are literally swamped in knowledge and technology, and our ability to communicate and trade with other nations is almost limitless.

Why then, do developed nations have budget deficits that have piled-up over the decades to the extent that some nations have debt levels approaching 260% of GDP? (NOTE: Government debt is merely the total of their accumulated deficits)

It’s a very good question and the answer is; WWI, WWII, the Cold War, assorted other wars like Vietnam, the 1990 Gulf War, the Iraq War and the Afghanistan War — all of these required massive spending on a buy-now/pay-later basis.

For one example of how costly this is, the total interest payments just to service U.S. government debt since deficit spending began, equals $2.5 trillion dollars.

Here are the highlights from the U.S. Debt Clock (courtesy of the U.S. Treasury)

  • U.S. total national debt — $19.8 trillion
  • U.S. debt per citizen — $61,131
  • U.S. debt per taxpayer — $166,240
  • U.S. budget deficit — $590 billion (when calculated using GAAP rules, this number totals $5.6 trillion)

America alone spent one trillion dollars on the Iraq War.

For one trillion dollars (from the year 2000 through the year 2050) every unemployed American citizen could have been given a job paying them $50,000/year for their entire working life, and each kid who couldn’t afford to pay their university tuition themselves could have gotten one baccalaureate degree paid for by the U.S. government, and each U.S. citizen living on welfare could have been paid $25,000/yr to keep the mailboxes on their street clean and painted, and the sidewalk swept. With quite a few billion dollars left over by the time 2050 rolled around.

Instead, all of the money spent on war by the United States was borrowed money that will never be paid off — and American citizens will be paying the interest indefinitely. Forever is a long time.

See this snapshot on U.S. government debt. Scared yet?

For comparison purposes, the population of the United Kingdom is almost exactly one-fifth of the United States. Below is a snapshot of Britain’s deficit and debt picture.

  • Britain’s total national debt — £1.7 trillion
  • Britain’s debt per citizen — £28,589
  • Britain’s debt per taxpayer — £49,174
  • Britain’s budget deficit — £19.1 billion
Britain - Government expenditures for Fiscal Year 2017

Britain – Government expenditures for Fiscal Year 2017

At the moment, the UK government is doing three things well to help Britain’s economy

The brightest spot for Britain’s economy is the already-passed legislation requiring that all central government budgets be balanced from 2020-onward.

Another hopeful sign is that Philip Hammond, Chancellor of the Exchequer, has devoted £1.3 billion to a road building plan in his recent Autumn Statement, thereby allowing thousands of workers to continue working, and adding hundreds of presently unemployed workers to the workforce.

In the creative accounting department, workers can now save some money and their employers can save even more — while both avoid some amount of National Insurance cost compared to the existing calculation method, via the so-called ‘Salary Sacrifice’ method.

Britain - Chancellor Philip Hammond does a little bit of magical accounting (the good kind) to make British tax law more efficient.

Britain – Chancellor of the Exchequer Philip Hammond does a bit of magical accounting (the good kind) to make British tax law more efficient. Click on the image to read the Daily Mail article.

While these seem to be small (but brilliant) improvements to the UK economy, it’s important to remember that the Theresa May government is less than 130 days old. And although these are baby steps, they are positive and add certainty to Britain’s economic outlook.

More fiscal and monetary levers need to be applied than that however. And importantly, countercyclical policy must be employed as a long-term economic lever throughout the British economy, with special emphasis on creating employment during economic downturns.

What else could be done to help Britain’s economy?

Quite a lot.

Every government in the world needs money to operate, and the taxes gained from personal income tax are already too high (just ask any taxpayer) while higher corporate taxes are detrimental to attracting business to your country.

Four quick ways to supercharge Britain’s economy

a) Match Canada’s lowest-among-the-G7 corporate tax rate
b) A 5% tariff on every imported good
c) Massive infrastructure spending programme equal to annual import tariff revenue
d) Legislation permitting up to 5% of electrical demand in each UK county be met with clean coal

Still bound by EU trade laws over the next (approx) 36 months, how can Britain excel economically?

a) One of the reasons that Canada virtually breezed-through the financial crisis of 2009-2012 is that it had the lowest corporate tax rate in the developed world, it ranks well for ease of doing business, and it has a streamlined process for existing businesses to relocate to Canada allowing corporations to easily move to a lower corporate tax rate — all of which worked to keep Canada on an even keel throughout the global financial crisis. (Not world-changing, but ‘just enough’ to get the job done for Canada)

In retrospect, during the boom times, a low Canadian corporate tax rate represented a slight loss in revenue for Canada, but during the recession the low corporate tax rate promoted many relocations to Canada — when they weren’t prevented by President Obama, that is.

In the case of the Burger King fast food chain, it decided to relocate to Canada in order to save billions in corporate taxes, however, the U.S. President decided to block the move. Although I’m still a fan of President Obama, it teaches us that there are very real limits to the benefits of low corporate taxes, due to market interference by politicians that say they believe in free markets, but don’t. And there are many of those.

Still, a low corporate tax rate that matches the Canadian rate would attract new business to Britain. There will be times that such moves are overruled by faux free trade governments, but on the main, Britain would gain more than it would lose by matching Canada’s corporate tax rate.

Yes, the UK government would lose some amount of corporate tax revenue in the short-term. However, that is balanced-off by the hundreds of new businesses that would relocate to Britain over the long-term — possibly even from Canada which can’t compete with the astronomical level of economic activity in London, nor a prestigious London address.

Inclusive in the term free enterprise with free markets, means that corporations are free to set their headquarters anywhere they want.

Where to recapture that corporate tax revenue loss and add billions more revenue?

b) The most efficient way for Britain to recover that short-term revenue loss and to gain billions more revenue, is by instituting a 5% tariff on every good that arrives in the country.

If Britain and her trade partners agree to the same 5% tariff and a standardized list of exemptions in their own countries, there will be nothing to fight over.

On a personal note, because I happen to believe that knowledge is the solution to all problems, I have a problem with taxes on books, whether they are books printed on paper, recorded on DVD’s, or are purchased as E-books.

Similar applies to those medicines that save lives. Such things should be exempted from all forms of taxation, including tariffs. Everywhere on the planet.

By instituting a nominal tariff of 5% Britain would also make imported products minimally more expensive, while Made in Britain products would become more cost-competitive. British manufacturing (jobs) would see an uptick and sales (profits) would increase.

NOTE: Not to make this too complicated here, but many of Britain’s exports are high-end items. If there happens to be a 5% tariff placed on British goods in other countries, don’t expect it to stop foreign buyers from purchasing an Aston Martin, for example.

At the other end of the market, low-end items such as imported T-shirts which typically sell for £1.40 will not be much affected by a 5% tariff. However, it would be reasonable to expect an uptick in the sales of UK manufactured T-shirts. (In a perfectly efficient UK T-shirt market, a 5% sales increase in UK manufactured T-shirts could be expected once the foreign manufactured T-shirt inventory is sold off)

Obviously, both the pricey and the least pricey items wouldn’t be much affected by a 5% tariff (for very different reasons) but foreign manufactured items in the middle price ranges will be the items affected, and the market would see a corresponding rise in the sales of UK manufactured items. Things like computer monitors, home exercise equipment, and food processors, for example.

A 5% tariff would raise uncountable billions of pounds sterling for the British government — exactly in the time of deficit elimination, and as unprecedented immigration levels have increased unemployment among blue-collar workers in Britain, and as Brexit roils the markets, and as a potentially protectionist U.S. administration is crowned.

In short, there is every reason for Chancellor of the Exchequer, Philip Hammond, to create a minimal and standardized tariff structure (that all of Britain’s trade partners could buy-into) means that it could be passed immediately if EU parties agree thereto. Otherwise, it can’t begin to take effect until the day after Brexit occurs.

Even so, there’s no reason that the legislation couldn’t be researched and written now, ready for Day One of post-Brexit Britain.

I can’t emphasize it enough. The Chancellor of the Exchequer and the Prime Minister must SELL their trade partners on this tariff, proving that it will be a net benefit to all of Britain’s trade partners. (If a mild tariff can do all that for Britain’s economy, it can do the same for EU nation economies)

In the absence of convincing EU trade partners of the wisdom of this plan, three years of tariff revenue will be lost — revenue that could have been used to dramatic effect in the UK economy.

c) While Philip Hammond’s £1.3 billion road building plan is a good one, it needs to be upgraded to a £130 billion national infrastructure plan.

So much of Britain’s infrastructure — from roads and bridges, to trains and trams, to airports and seaports, and to significant other structures and buildings — need replacement, repair, or major upgrades.

It could even save money over the long-term. In the case of many of Britain’s old government buildings, due to their obscene electricity consumption and inefficient insulation, some old buildings cost millions of pounds per month to light and heat.

Building new, Zero Net Buildings, means that they produce as much energy as they consume over the course of the year, saving millions of pounds sterling annually.

Retrofitting older structures isn’t quite as efficient, yet can still save millions of pounds annually.

Millions of British jobs would be created over 10-years and all of it paid for by a tariff on imported goods.

(Yes China, the U.S., and other UK trade partners, please export more stuff to Britain, as we need the tariff revenue!)

The tariff could easily provide enough funding to accomplish all of this and more, once Britain is running balanced budgets.

d) Legislation that permits up to 5% of electricity demand *in each UK county* be met with clean coal, means return to employment for thousands of coal miners, it means the construction of hundreds of small, clean-coal power stations, and it means that an amount of reliable and cheap electricity equal to the demand of all government buildings is sourced, produced, and sold — in Britain, for Britain, and by Britons.

Allowing 5% of demand per county to be met with clean coal power stations ensures that the country can stay on track to meet its international CO2 commitments and avoid the negative healthcare costs associated with behemoth scale coal power stations located near major population centres.

These are simple ways to attract new business to Britain, to increase revenue for a government still on the mend from the global recession, to create jobs and increase profits for the construction, manufacturing, and coal mining and coal-fired generation segments of the economy, and to add much-needed stability to the UK energy grid.

Instead of waiting to do it all after Brexit — and who knows what might happen to the global economy in the meantime — it’s better to take Britain out of its economic shackles, now, proactively, and with vigour.

The Chancellor of the Exchequer, Philip Hammond, has made some deft moves in recent days. Let’s hope this is the beginning and not the end of this trend.

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Brexit, and now, Trump. What’s driving voters to reject the status quo?

by John Brian Shannon | November 14, 2016

After eight years of competent and relaxed rule by President Barack Obama, real estate tycoon Donald Trump arrived on the scene and swept Democrats and other Republicans aside to win the presidency of the United States. So obviously a protest vote — but a protest against what?

Pollsters and so-called ‘elites’ seem astonished at the Trump victory yet many saw it coming from afar. How is it that some people ‘never saw it coming’ while others saw it as a logical progression of the present societal moment?

The U.S.A. has a total population of 325 million people (November 2016) and when we look at the demographics of the country by quintiles, we see that there are five groups of 65 million people.

Each group is ‘one quintile’. The ‘top quintile’ are those who are the top income earners in the country, while the ‘bottom quintile’ are the lowest income earners in the country, etc.

The so-called ‘elites’ live in sumptuous luxury that few can imagine and tend to have stable lives which is a direct consequence of their high income levels and (usually) higher level of education.

Ninety-four percent of the people who live in the top-two quintiles are children of parents who also lived in the top-two quintiles.

(Yes Virginia, wealth is largely inherited and many studies attest to this — the myth of ‘work hard and you’ll get ahead’ represents only six-percent of the top-two quintile population in Western nations)

The bottom-three quintiles in America have been losing ground since the 1970’s when one person (the ‘breadwinner’ of the family) was able to earn enough to support a family, buy a reasonable home, and a new car every 2-3 years without needing to finance the purchase, take one vacation per year, and send their kids to college. All on the strength of one income-earner!

Nowadays, the bottom quintiles are barely working, many of their jobs off-shored to Asia. For those fortunate enough to have a job, it takes two income-earners to rent or buy a condo, buying a car means financing it for up to 8-years, and one ‘staycation’ per year (staying near home during vacations, with only daytrips to nearby sights) while their kids must obtain expensive student loans that can take decades to pay off.

It’s a different world from the 1960’s and 1970’s.

The major reason for this is the Reagan-era tax cuts that were designed to stimulate growth and investment in the U.S. economy (which were the right prescription for the times) and those tax cuts created a record number of billionaires which eventually resulted in the creation of the so-called ‘1 percent’ who now invest their money in the ‘Asian Tiger’ economies which bring better financial rewards for those investors, but results in the off-shoring of millions of jobs in the Western nations.

At present, the 1 percent own more than 50% of the world’s total wealth. Leaving less than one-half of the world’s wealth for the remaining 7.3 billion people.

But by 2030, the 1 percent will own more than 75% of the world’s total wealth. Leaving only one-quarter of the world’s wealth for the (then) 8 billion people on the Earth.

And in 2040, the 1 percent will own more than 85% of the world’s total wealth. Leaving only one-sixth of the world’s wealth for the (then) 8.75 billion people to fight over.

World Wars have been waged over less!

Brexit, and now, Trump.

Brexit, and now, Trump. Share of the world’s total wealth for the Top 1 percent and the Bottom 99 percent. Image courtesy of OXFAM.

People wrongly blame ‘Globalization’ for this sorry state of affairs but it was a profound change in U.S. tax laws that allowed wealth to flow upward to the 1 percent who simply take their money and invest it in Asia. It represents trillions of dollars (U.S. and Canada) and trillions of euros (EU) and hundreds of billions of pounds sterling that will never, ever, return. It’s money that has left the West forever.

And some people wonder why things like Brexit and the stunning repudiation of the status quo candidate in the U.S.A. (Hillary Clinton) have occurred? Really? Are you kidding me?

Politicians and so-called ‘elites’ who didn’t see this coming have no business leading nations, nor should they be calling themselves ‘elites’ — nor have they ever spent a minute talking with a member of the bottom three quintiles in any Western nation.

In democratic societies ‘The People’ are always right. Some 52% of Britons voted to leave the EU, hoping for a better democracy and a better economy, while in the U.S.A. millions of voters chose hope over the status quo.

Upcoming elections in Italy, the Netherlands, France, and other Western nations are likely to show similar results.

It’s startlingly clear. ‘The People’ aren’t looking for more of the same. They voted for real change — not talk about change!

Politicians like PM Theresa May and President-elect Donald Trump have garnered a huge mandate for change. For politicians, it doesn’t get any better than this. Whatever these politicians do as long as it looks like they’re attempting to meet the needs of ‘The People’ they will be generously rewarded for their successes and easily forgiven if a particular policy fails to meet expectations.

It’s a time of unprecedented opportunity for politicians who’ve upset status quo candidates, but failure to deliver meaningful change now will bring us uncomfortably close to a total breakdown of the social contract that has worked so well for citizens and governments in the postwar era.

For those politicians elected to bring change, but who subsequently fail to do so, will find themselves losing landslide elections four years on — while bringing the wrath of ‘The People’ against ‘The Establishment’.

Let us do our part to make it easy for newly-elected politicians to do the right thing, and to forgive them easily if perchance some minor policy point goes awry.

We all need to do our part to assist the change that must now occur — otherwise, by 2040, some 8.5 billion people will be fighting over 15% of the world’s total wealth — resulting in an apocalypse worse than anything we’ve yet seen.

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