Sunday, February 19, 2017

Paul Collier's on future of capitalism - social maternalism grounded on pragmatism?

Paul Collier (HT: Ananth) channels Jonathan Tepperman's recipe for successful national transformations from his book The Fix which chronicles ten case studies of national leaders,
eschew ideology; focus on pragmatic solutions to core problems, adjust as you go, but be as tough as is necessary.
The article is good in general, as Collier seeks to chart out a course of capitalism. He identifies "pragmatism" as the new ideology. He advocates the use of tax policies to generate growth - moving away from income-specific to context-specific taxes, that discriminates based on source of income (rents as against innovation), regulatory arbitraging (real economy versus sharing economy), resource misallocation (financial markets versus real economy), geographical privileges (cities as against suburbs and rural areas), etc. 

Consider the case of how cities privilege its residents and especially the high income earners among them,
A megacity is a powerful engine of inequality. Exceptional taxation is justified because only some of the high incomes generated in a megacity are attributable to the few who appear to earn them. The rest are attributable to everyone who contributes to the connectivity, including those who do not live in it. A straightforward example is land values. Since locating in the city enables firms and workers to be more productive, its land becomes valuable... London abounds in such “undeserving rich” because governments have been slow to use the tax system to offset them. Despite Brexit, London is a vast reservoir of unexploited tax potential: it is the new oil. The provinces are right to be angry. A metropolis differentially benefits the highly educated. The scope for specialization enables them to use specialist skills that become very valuable. Someone with the brains and opportunity to have fathomed the intricacies of finance will be hugely valuable within the City of London, and so will earn a fortune. But that productivity is in part due to advantages such as the integrity of English law and non-corrupt government, endowments from generations of national struggle. These super-returns from a London location accrue, by default and disproportionately, to the high-skilled worker; but there is a good normative case that they should be shared more evenly, and so highly educated Londoners are less deserving than they think. 
 And on resource misallocation,
Uncorrected, the market will generate too many asset managers and lawyers and too few innovators. What is needed instead is a redesign of corporate taxation... smart corporate taxation would shift resources from those activities where there are too many people to those where there are too few. It would become an instrument in delivering growth, not public services.
 On the sharing economy,
Those changes that cause major disruption, such as Uber and the impending switch to driverless vehicles, could be taxed, not so heavily as to prevent them but to ensure that they pay for the social costs that they inflict. Currently, tax systems are so antiquated that the same transaction is taxed more lightly in the “gig economy” than in a conventional business: in part, Uber, airbnb (and Amazon) are tax scams.
In corporate practices,
Currently, massive economic power is concentrated in the hands of chief executives, disciplined only by whether asset managers ditch their shares. This has led to two serious forms of abuse. One takes us back to rents: British CEOs virtually set their own pay, constrained only by City norms. As decency has eroded, their pay has risen 80 per cent in the past decade, with negligible evidence of enhanced performance. They are the highest-paid CEOs in Europe. The other abuse is that the bonus-driven short-termism of asset managers has made firms averse to long-term investment, not just in equipment but in their workforce. As labour markets have become more “flexible”, the low unemployment that flexibility has delivered has come at the price of reduced training.
Collier concludes,
I think of the pragmatic policies I have suggested as social maternalism. In this model the state would be active in both the economic and social spheres, but it would not overtly empower itself. Its tax policies would restrain the powerful from appropriating rents, rather than stripping income from the rich to help the poor. Its regulations would empower those who suffer from creative destruction to claim compensation, rather than attempting to frustrate the very process that gives capitalism its astonishing dynamic. Its inclusive nationalism would be a force for binding together, replacing the emphasis on the fragmented identities of grievances. Its social interventions would aim to sustain those families that are stressed, rather than assuming for itself the role of parent.

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