Jonathan Todd

I often find the Economist to be a beacon of sanity in an increasingly mad world. “When governments raise money”, they note in a fashion that demonstrates a grasp of Adam Smith’s principles of taxation, “they should first get rid of deductions and reverse unmeritocratic measures (such as George Bush’s repeal of America’s death tax) rather than jacking up income-tax to punitive levels”. Smith’s fourth principle stated that, “taxes should not discourage enterprise”.

Punitive income-tax discourages enterprise, while inheritance tax – that’s what it is, not death by a thousand cuts or some such, as even the Economist, disappointingly, suggest by use of the inappropriate “death tax” term – is a tax on unearned wealth. It, therefore, discourages enterprise and encourages Paris Hilton-like and other trust-funded behaviour. Nigella Lawson understands this – and she’s married to Charles Saatchi! So, why does the Adam Smith Institute find this so hard to understand?

Language matters in this debate. The well read will have noted that I have already citied Michael Graetz and Ian Shapiro’s fantastic study into the politics of this issue under President George W. Bush. By framing the tax as a “death tax” the administration succeeded in painting the tax collector as so heartless as to continue his collections beyond the grave; a cruel invader upon families at tragic times. However, inheritance tax is the right term because the person who loses out is the person who hasn’t worked for the wealth; the inheritor. I don’t care how upset the likes of Paris Hilton may get when their parents die, they still won’t have earned the wealth that they might inherit and the tax collector should still be paid. They should be enterprising enough to earn their own wealth. That’s part of what meritocracy means.

Luke Haines was, of course, being ironic when he sang that: “There’s nothing wrong with inherited wealth, if you melt the silver yourself”. And a few dodgy sex videos and what-not still doesn’t make it right, either – or change the fact that it is a tax on the unearned wealth of inheritance, not death.

Interesting stuff from Mahmood Mamdani in the London Review of Books. I was particularly struck by one observation in particular.

“There is no denying Mugabe’s authoritarianism, or his willingness to tolerate and even encourage the violent behaviour of his supporters. His policies have helped lay waste the country’s economy, though sanctions have played no small part, while his refusal to share power with the country’s growing opposition movement, much of it based in the trade unions, has led to a bitter impasse. This view of Zimbabwe’s crisis can be found everywhere, from the Economist and the Financial Times to the Guardian and the New Statesman, but it gives us little sense of how Mugabe has managed to survive. For he has ruled not only by coercion but by consent, and his land reform measures, however harsh, have won him considerable popularity, not just in Zimbabwe but throughout southern Africa. In any case, the preoccupation with his character does little to illuminate the socio-historical issues involved.

“Many have compared Mugabe to Idi Amin and the land expropriation in Zimbabwe to the Asian expulsion in Uganda. The comparison isn’t entirely off the mark. I was one of the 70,000 people of South Asian descent booted out by Idi Amin in 1972; I returned to Uganda in 1979. My abiding recollection of my first few months back is that no one I met opposed Amin’s expulsion of ‘Asians’. Most merely said: ‘It was bad the way he did it.’ The same is likely to be said of the land transfers in Zimbabwe.”

The Economist, like most European observers, remains clearly astonished that “South Africa and the Southern African Development Community, the 15-country regional club, continue to wobble and waffle”. Perhaps the wobbles and the waffle are more comprehensible if the land transfers in Zimbabwe are perceived in southern Africa as Mamdani suspects? This doesn’t make inaction any more excusable, however, and it is heartening that The Economist appears to see events in Zimbabwe as potentially heading towards some kind of desperately needed resolution.

“Calling for military intervention before wider sanctions have been applied is premature, even though it may come to force in the end. And economic sanctions are themselves a blunt instrument that sometimes harm the people more than the rulers. Stopping oil supplies may have just that effect. But UN sanctions focused tightly on Mr Mugabe and his coterie, and supported by South Africa, could have a big impact. The leader of South Africa’s ruling party, Jacob Zuma, likely to be the country’s president next year, must surely respond to the crescendo of outrage. The power-sharing deal is being overtaken by events. Mr Tsvangirai is right to reject the one-sided conditions under which Mr Mugabe says he will implement it. As cholera and refugees threaten to destabilise South Africa itself, its rulers must start to consider drastic measures to rescue the benighted country that Zimbabwe has now become.”

The day of the Pre-Budget Report has brought several indications that many are thinking in similar terms to me on the economics and politics of the environment. Please see here, here and here. None of this, however, amounts to an advocacy of totemic environmental white elephants purchased from the public purse. While there may be a greater role for public spending in an industry like the environmental one, where much infrastructure remains to be built, like the Economist, I am no more convinced by the ability of government to pick green winners than I am any other kind of winner. Markets are better at doing this. The lessons should be learnt from the failings of the EU carbon market  and governments should be the architects of markets within which the green winners of the future will emerge.

President-elect Obama probably now receives more advice than anyone else in the world. The advice below from the Economist strikes me as being likely to be amongst the most important of the advice he receives, however.

“At the end of the 19th century, Britain was the world’s superpower. By the end of the 20th it was America. The transition was preceded by two world wars. Some time in this century, the balance of power will change again. Mr Obama has inherited a world of pressing troubles. But as he tackles them he will have to keep an eye on the longer game: how to prepare for the day when America may no longer be sole superpower and only the first or maybe the second of many big powers. To manage that transition peacefully and still promote the spread of free markets and liberal democracy: that will be the mark of a truly great president for the 21st century”.

The longer game increasingly intrudes upon the shorter game. Success in the longer game has to mean modernised multilateral institutions. Martin Wolf makes a fascinating point on an underlying challenge to such institutions in the economic sphere, which has been thrown into much starker relief by the credit crunch.

“The first is the inability to gain a purchase on the policies of countries that run huge and persistent current account surpluses. That was a dominant concern of John Maynard Keynes in 1944. Ironically, the problem then was US surpluses. Today, it is the collapse in the ability of US households and those of a few other high-income countries to offset the vast current account surpluses generated by China, Germany, Japan and oil-exporting countries. Surplus countries love criticising those who spend what they wish to lend. The former will soon discover they cannot do without the profligacy of the latter”.

So China is today to the global economy what the US was in 1944: the leading current account surplus country. The proposals which John Maynard Keynes made at Bretton Woods to deal with such surpluses were rejected due to American opposition. But these proposals may be worth revisiting in any move towards a Bretton Woods II. This would lead to a much reformed IMF and World Bank. Their current structure reflect the global realities of the time of their formation when climate change, for example, was unheard of and World War II had recently ended, as does the UN, which is equally ripe for reform. It will require immense political skill to take any of this forward, however. Still, at least, the President-elect believes in these multilateral institutions, in stark contrast to the President he will replace. George W Bush rode roughshod over these institutions in ways that appeared short-sighted at the time and only appear more so with the passing of time.

I invariably feel that the Economist talks a lot of sense, so I was delighted to see them endorse Obama this week.