Ed Smith in Cricinfo
People who don't believe that the media indulges honeymoon periods should consider the relative treatment of Alastair Cook and Eoin Morgan. Having survived a media storm as Test captain in the summer of 2014, Cook was eventually sacked as ODI captain at the 11th hour before the World Cup. Most pundits felt this was a good idea, even though it left Cook bereft of his dream of captaining in a World Cup, and left Morgan very little time to put his stamp on the team.
Now Morgan has scored three noughts in his last four innings and four noughts in his last seven. Many of those who called for Cook's sacking seem very relaxed about this, citing's Morgan superb natural talent and better track record as an ODI match-winner. Yet Cook's resilience and capacity for enduring pressure was equally well-established. In short, I'm less convinced that Morgan's bad form exists in a different category from Cook's.
The reasons given for Cook's sacking were: 1) his poor form with the bat, and 2) the need to protect his long-term prospects as an England player. The selectors felt that continuing with Cook for the World Cup might radically deplete his resources. Effectively it would burn through too many miles on the clock, racing Cook towards a hastier exit from the English game. Though no one seemed to notice at the time, exactly the same arguments could have been presented as reasons for not making Morgan captain either. If Cook was in danger of ending the World Cup exhausted and short of confidence, Morgan might end it disillusioned and disengaged, one step closer to a career oriented to the roving life of a T20 specialist. It is far too early to be certain - England could still win the competition with Morgan as its hero - but it is a very real possibility that in sacking one captain England will end up undermining two careers.
There is a much deeper question. How much does the captaincy, over the short term, affect performance? Morgan or Cook? Bailey or Clarke? Everyone has a view and can marshal the evidence to support their prejudices. It makes a nice "talking point", as the saying goes. That does not, however, mean the decision under review is important in explaining events.
Put differently, what if England would have lost anyway on Saturday, whoever was captaining? And suppose that Australia would have won, whichever of their strong captaincy candidates was in charge? In obsessing about the psychodrama at the top, we ignore the underlying fundamentals.
There are two central trends in the evolution of professional sport and its coverage. The odd thing, however, is that the two movements are contradictory, indeed irreconcilable.
The first is the cult of personality the hero, the champion, the winner, the master of mind games, the tactical wizard, the leader of men, blessed with the Midas touch. This is the way elite sport is frequently presented and analysed. Why? First, because it fits the modern obsession with celebrity; secondly, because it is endlessly useful as a media "talking point" - big personalities are always easier to discuss than systems or ideas.
Then there is the underlying reality of how professional sport is actually evolving. Every top team now employs a massive backroom staff of coaches, physios and analysts, all of whom are trying to find a tiny incremental advantage, a fraction of 1% here or there, to help their team. The idea that one single mind controls the whole team is laughably out of date. Even in football, where the manager is like the cricket captain, coach and selection panel rolled into one, he actually sits atop a vast coaching machine. Yes, he steers the wheel, but there are many more cogs in the machine than ever before.
In cricket, the captain's power and control are increasingly shared with other influences on the team. He can still make a difference, of course. But he exists in a highly professional context in which control is shared widely.
I was recently asked to write a new introduction to the reissue of Mike Brearley's iconic book The Art of Captaincy. One thing that struck me was how much more control Brearley had over his teams than any captain would have today. On being recalled as England captain in 1981, one of his first acts was to restore the pre-match warm-up and stretching routine. It is unimaginable today - given the number of physios and trainers - that this area of team life would be the preserve of the captain.
Critics of captains today lightly ignore a contradiction: modern captains certainly have less power than ever, yet they are still held overwhelmingly accountable for decisions and tactics that usually originated in discussions with the team's whole top table.
We have not yet mentioned by far the biggest constraint of all on any captain: the form and quality of the players.
In his post-match interview, Morgan was asked by Andrew Strauss why the England death bowlers favoured the bouncer over the yorker. Morgan's answer was that the boundaries at the MCG are shorter straight (65 yards) than square of the wicket (85 yards). Yorkers tend to be hit down the ground, whereas short balls are often hit square of the wicket. So as the fielding captain, Morgan was trying to force batsmen to play the harder, riskier shot. Had England bowled well, this would have sounded shrewd and canny. Because England bowled badly, it sounded too clever by half. In other words, it is the bowlers who make and unmake the success of tactics, not captains.
I will always believe in the power of great leadership, especially by gradually improving team culture over the long term. Right now, however, the correct answer to the question "Bailey or Clarke?" and "Morgan or Cook?" is: "Nice talking point, but it doesn't explain very much about the result."
Monday 16 February 2015
Saturday 14 February 2015
How economists view love, marriage, and Valentine’s Day
Pramit Bhattacharya in Live Mint
Can the dismal science of economics throw light on the seemingly irrational phenomenon of love? For a long time, economists did not consider love to be within the ambit of their study, and ignored it altogether even as they used the economic lens to study other esoteric subjects such as crime and fertility. The neglect of love ended in the 1970s, when the Nobel winning economist Gary Becker for the first time laid out a framework to analyse love and marriage in a series of research papers.
Using simple economic tools and high school algebra, Becker showed how seemingly irrational life choices and decisions could in fact be explained by rational choice theory. Becker’s analysis was based on two simple principles. First, given that marriage is almost always voluntary, either by the couples or their parents, the theory of preferences can explain marriage and couples (or their parents) can be expected to derive more satisfaction (or higher utility) from being married than from remaining single. Second, Becker held that a market in marriages can be presumed to exist since many men and women compete as they seek mates. Each person tries to find the best mate subject to market conditions.
Based on these two principles, Becker draws out a theory of marriage that says that each person will tend to pair with someone with whom the chances of maximizing their household production of goods and services are the highest. The set of household goods and services include tangible goods the market provides as well as non-market goods such as shared pastimes, or the joys of raising children. The couple’s level of satisfaction is determined both by market and non-market earnings. But, given that time and effort spent on raising market earnings can diminish non-market earnings, each couple uses economic principles to allocate the scarce resource of time.
Becker argued that the division of labour within the family is driven by the differences in market earnings, which in turn are determined by the marginal productivity of the two partners. The partner with a higher wage then specializes in the production of market goods and services, while the partner with the lower wage specializes in the production of non-market goods and services. Other things being equal, a high-earning male is more likely to marry a low-earning female and vice-versa. Of course, if women are perceived to have a comparative advantage in the production of non-market goods (such as those involved in raising children), it is likely that the marriage market equilibrium will tend to have many more pairs where men rather than women are the sole wage earners.
While spouses are likely to differ in market earnings, both theory and empirical evidence suggested likes tend to attract more when it comes to other attributes such as education or physical attractiveness, wrote Becker. He argued such attributes as education or beauty are complementary inputs in the production of non-market goods and services whereas wage income could be substituted by one partner for the other. The lack of complementary attributes could well explain a significant chunk of separations among couples, Becker hypothesized.
The gains from marriage are determined by how the division of labour occurs. If a lot of effort is expended on policing whether a partner is performing his or her assigned role, then the net gains to the couple will be relatively less (the gains are essentially reduced because of transaction costs). The gains also depend on whether a sizeable fraction of the output generated after marriage can be jointly shared. Love accentuates the gains from marriage because each partner then cares about the satisfaction (or utility function) of the other. Consequently, with love, transaction costs are lowered and the gains from marriage increase. Love also increases the likelihood of increased production of shared family goods, thereby raising the gains from marriage further.
Becker was among the first economic imperialists who extended the reach of economics to analyse complex social behaviours that were considered the exclusive domain of sociology. Social scientists initially ignored, then mocked, and finally began accepting some of Becker’s key insights into the nature of marriage. Later work by economists and sociologists have refined, extended and, in some cases, revised Becker’s framework.
A 1997 review essay by economist Yoram Weiss of Tel-Aviv University succinctly summarizes some of the key economic insights into marriage. Weiss lists four key economic reasons for marriage. First, division of labour after marriage tend to raise joint gains. Second, with imperfect credit markets, marriage can solve credit intermediation problems, with one partner investing in the other. For instance, if both partners work but one has a greater ability to earn, it may be profitable for the partner with the lower ability to earn to fund his or her partner’s education while he or she takes care of home expenses. Such arrangements are indeed common in the modern world. Thirdly, marriage leads to the production of shared family goods (more technically, public goods, which are non-rivalrous and non-excludable). Finally, marriage leads to risk-pooling when two partners have uncertain but different sources of income.
An influential 1999 study of cohabiting couples by sociologists Julie Brines and Kara Joyner extended Becker’s framework of married couples to analyse the behaviour of people living together. The duo analysed data on both married and cohabiting couples to find that although there was some evidence pointing towards specialization among married couples, the evidence was weak.
There was no evidence to suggest specialization among cohabiting couples. On the contrary, live-in relationships tended to be durable when both partners shared equally in domestic work. Unlike married couples who have a more collectivist approach, cohabiting couples tend to display a more individualist streak. Hence, cohabiting couples tend to balance their individual interests by basing their behaviour on the principle of equality.
More interestingly, the chances of a break-up were far higher among cohabiting couples than among married ones when women earned substantially more than men. In contrast, the chances of a break-up are much smaller when a wife begins to earn more than her husband. While cohabitation seems to be based on the premise of equality and rejects traditional gender roles, it is not immune to them, the study suggests. It is marriage that seems to withstand unorthodox economic power relations better.
“Cohabitation draws part of its appeal from an image that promises greater flexibility and experimentation,” wrote Brines and Joyner. “In short, it bespeaks few ‘rules.’ For a relationship to persist, however, some operating principle must mediate the tension between the interests of the parties involved. For husbands and wives, the marriage contract helps to manage these interests, encourages joint investment, and permits some flexibility around the norm of male providership…. For cohabitors, uncertainty and implied contracts intensify the tension between the interests of the two partners and place greater stress on a bargaining principle that is difficult to adhere to over time. Thus, we find that breaking the rule in an arrangement ‘without rules’ is more disruptive than any comparable violation in marriage.”
As Weiss pointed out in her essay, economics alone is not enough for marital analysis. Very often non-economic considerations do play a dominant role in romantic relationships. Yet, economics can provide valuable insights into the nature of relationships, which together with observations from other disciplines such as sociology can feed into a unified theory of relationships.
The power of economics stems from its ability to explain how rational calculations underlie seemingly irrational behaviour. Even romantic melodrama, such as a lover fasting outside his beloved’s house, can be explained by rational choice theory. Such an act is a powerful way of signalling commitment, according to the Nobel economist Michael Spence.
Do Valentine’s day gifts also satisfy the test of economic rationality? Neil MacArthur and Mariana Adshade use game theory to show why it is best to avoid such gifts, especially if a couple is already committed.
“Valentine’s Day, essentially, is a game in which each person who is in a relationship must choose between two strategies; buy a gift for their significant other or do nothing to celebrate the day,” the duo writes.
Given that there are two players, each with two strategic options, there are three possible outcomes that can happen on the day. The first outcome is that both buy gifts, and are satisfied to learn that their partner is committed to the relationship. But that satisfaction comes at a huge cost as most Valentine day gifts are over-priced. The second outcome is that one partner buys a gift and the other does not. One need not explain the consequence. Suffice to say that break-ups tend to spike up in the second half of February, according to Facebook data. The third outcome is that neither gifts.
“The best strategy would be for couples to ignore the holiday altogether, but they won’t because there is just too much pressure to conform to the holiday traditions from both inside and outside the relationship. From a game strategic perspective, participating in the holiday just leads to sub-optimal outcomes,” the duo argues.
Can the dismal science of economics throw light on the seemingly irrational phenomenon of love? For a long time, economists did not consider love to be within the ambit of their study, and ignored it altogether even as they used the economic lens to study other esoteric subjects such as crime and fertility. The neglect of love ended in the 1970s, when the Nobel winning economist Gary Becker for the first time laid out a framework to analyse love and marriage in a series of research papers.
Using simple economic tools and high school algebra, Becker showed how seemingly irrational life choices and decisions could in fact be explained by rational choice theory. Becker’s analysis was based on two simple principles. First, given that marriage is almost always voluntary, either by the couples or their parents, the theory of preferences can explain marriage and couples (or their parents) can be expected to derive more satisfaction (or higher utility) from being married than from remaining single. Second, Becker held that a market in marriages can be presumed to exist since many men and women compete as they seek mates. Each person tries to find the best mate subject to market conditions.
Based on these two principles, Becker draws out a theory of marriage that says that each person will tend to pair with someone with whom the chances of maximizing their household production of goods and services are the highest. The set of household goods and services include tangible goods the market provides as well as non-market goods such as shared pastimes, or the joys of raising children. The couple’s level of satisfaction is determined both by market and non-market earnings. But, given that time and effort spent on raising market earnings can diminish non-market earnings, each couple uses economic principles to allocate the scarce resource of time.
Becker argued that the division of labour within the family is driven by the differences in market earnings, which in turn are determined by the marginal productivity of the two partners. The partner with a higher wage then specializes in the production of market goods and services, while the partner with the lower wage specializes in the production of non-market goods and services. Other things being equal, a high-earning male is more likely to marry a low-earning female and vice-versa. Of course, if women are perceived to have a comparative advantage in the production of non-market goods (such as those involved in raising children), it is likely that the marriage market equilibrium will tend to have many more pairs where men rather than women are the sole wage earners.
While spouses are likely to differ in market earnings, both theory and empirical evidence suggested likes tend to attract more when it comes to other attributes such as education or physical attractiveness, wrote Becker. He argued such attributes as education or beauty are complementary inputs in the production of non-market goods and services whereas wage income could be substituted by one partner for the other. The lack of complementary attributes could well explain a significant chunk of separations among couples, Becker hypothesized.
The gains from marriage are determined by how the division of labour occurs. If a lot of effort is expended on policing whether a partner is performing his or her assigned role, then the net gains to the couple will be relatively less (the gains are essentially reduced because of transaction costs). The gains also depend on whether a sizeable fraction of the output generated after marriage can be jointly shared. Love accentuates the gains from marriage because each partner then cares about the satisfaction (or utility function) of the other. Consequently, with love, transaction costs are lowered and the gains from marriage increase. Love also increases the likelihood of increased production of shared family goods, thereby raising the gains from marriage further.
Becker was among the first economic imperialists who extended the reach of economics to analyse complex social behaviours that were considered the exclusive domain of sociology. Social scientists initially ignored, then mocked, and finally began accepting some of Becker’s key insights into the nature of marriage. Later work by economists and sociologists have refined, extended and, in some cases, revised Becker’s framework.
A 1997 review essay by economist Yoram Weiss of Tel-Aviv University succinctly summarizes some of the key economic insights into marriage. Weiss lists four key economic reasons for marriage. First, division of labour after marriage tend to raise joint gains. Second, with imperfect credit markets, marriage can solve credit intermediation problems, with one partner investing in the other. For instance, if both partners work but one has a greater ability to earn, it may be profitable for the partner with the lower ability to earn to fund his or her partner’s education while he or she takes care of home expenses. Such arrangements are indeed common in the modern world. Thirdly, marriage leads to the production of shared family goods (more technically, public goods, which are non-rivalrous and non-excludable). Finally, marriage leads to risk-pooling when two partners have uncertain but different sources of income.
An influential 1999 study of cohabiting couples by sociologists Julie Brines and Kara Joyner extended Becker’s framework of married couples to analyse the behaviour of people living together. The duo analysed data on both married and cohabiting couples to find that although there was some evidence pointing towards specialization among married couples, the evidence was weak.
There was no evidence to suggest specialization among cohabiting couples. On the contrary, live-in relationships tended to be durable when both partners shared equally in domestic work. Unlike married couples who have a more collectivist approach, cohabiting couples tend to display a more individualist streak. Hence, cohabiting couples tend to balance their individual interests by basing their behaviour on the principle of equality.
More interestingly, the chances of a break-up were far higher among cohabiting couples than among married ones when women earned substantially more than men. In contrast, the chances of a break-up are much smaller when a wife begins to earn more than her husband. While cohabitation seems to be based on the premise of equality and rejects traditional gender roles, it is not immune to them, the study suggests. It is marriage that seems to withstand unorthodox economic power relations better.
“Cohabitation draws part of its appeal from an image that promises greater flexibility and experimentation,” wrote Brines and Joyner. “In short, it bespeaks few ‘rules.’ For a relationship to persist, however, some operating principle must mediate the tension between the interests of the parties involved. For husbands and wives, the marriage contract helps to manage these interests, encourages joint investment, and permits some flexibility around the norm of male providership…. For cohabitors, uncertainty and implied contracts intensify the tension between the interests of the two partners and place greater stress on a bargaining principle that is difficult to adhere to over time. Thus, we find that breaking the rule in an arrangement ‘without rules’ is more disruptive than any comparable violation in marriage.”
As Weiss pointed out in her essay, economics alone is not enough for marital analysis. Very often non-economic considerations do play a dominant role in romantic relationships. Yet, economics can provide valuable insights into the nature of relationships, which together with observations from other disciplines such as sociology can feed into a unified theory of relationships.
The power of economics stems from its ability to explain how rational calculations underlie seemingly irrational behaviour. Even romantic melodrama, such as a lover fasting outside his beloved’s house, can be explained by rational choice theory. Such an act is a powerful way of signalling commitment, according to the Nobel economist Michael Spence.
Do Valentine’s day gifts also satisfy the test of economic rationality? Neil MacArthur and Mariana Adshade use game theory to show why it is best to avoid such gifts, especially if a couple is already committed.
“Valentine’s Day, essentially, is a game in which each person who is in a relationship must choose between two strategies; buy a gift for their significant other or do nothing to celebrate the day,” the duo writes.
Given that there are two players, each with two strategic options, there are three possible outcomes that can happen on the day. The first outcome is that both buy gifts, and are satisfied to learn that their partner is committed to the relationship. But that satisfaction comes at a huge cost as most Valentine day gifts are over-priced. The second outcome is that one partner buys a gift and the other does not. One need not explain the consequence. Suffice to say that break-ups tend to spike up in the second half of February, according to Facebook data. The third outcome is that neither gifts.
“The best strategy would be for couples to ignore the holiday altogether, but they won’t because there is just too much pressure to conform to the holiday traditions from both inside and outside the relationship. From a game strategic perspective, participating in the holiday just leads to sub-optimal outcomes,” the duo argues.
Friday 13 February 2015
What does 'to be human' mean?
'To be human is to feel pulled in different directions, and to marvel - sometimes in horror- at your inability to control your own actions.' Jonathan Haidt.
Migrating to Canada? Changes in Canada's immigration policy
Murtaza Haider in The Dawn
It used to be a sure shot thing: arrive as a foreign student in Canada, graduate with a degree or a diploma, and apply for permanent residency.
But the changes in the Canadian immigration regulations, which came into effect on January 1, have turned a sure thing into a game of chance, where the Canadian government will draw names from a pool of candidates, who will then be invited to apply for permanent residency.
If you were planning to take on huge debts to finance your studies in Canada in hope for a permanent residency later, be careful. After accumulating huge student loans, you will still have to compete with other skilled workers to get a shot at permanent residency — for only those jobs for which no Canadian worker is available.
While the new regulations have added new challenges for foreign students in Canada, they have also improved the odds for highly-skilled professionals and trades. Instead of a 'first come, first serve' basis, the new immigration regulations will fast-track those prospects whose skills are more in demand in Canada.
As a prospect, one needs a job offer from Canada for advance standing, even before one applies for permanent residency.
The Canadian immigration system was a huge mess. In 2012, 280,000 applicants were waiting to hear back on their applications. The system lacked coordination with the labour markets. Physicians were getting permanent residency, whereas their odds to practice medicine in Canada were very low. This changed in 2012, when the government returned all under process applications and started afresh.
While the changes may look drastic, they benefit those whose odds of finding an employment and adjusting in Canada are stronger.
Despite the changes, Canada will still welcome over 172,000 individuals under the economic class of migrants in 2015.
Application by invitation only
A key difference in the new system is that only those prospects who meet a certain threshold will be invited to submit a formal application for permanent residency.
The two-tier system invites prospects to create an online profile with the government. A new scoring algorithm will automatically score the prospect; for which the maximum achievable score is 1200. Based on the current needs of the labour markets, the federal government will draw names from the pool of prospects several times during the year to admit over 172,000 skilled workers.
These changes guarantee that the system is not overburdened by applicants who are less likely to adjust in Canada.
Who wants to be an immigrant?
The new regulations make a direct connection between the needs of the labour markets and the skill sets of aspiring immigrants. The government has made the task rather simple for applicants to determine the labour market needs in Canada. The aspirants must visit the Canada job bankto learn about the vacancies.
Most readers of this blog will be up for a surprise. Canada is not particularly looking for engineers, doctors, research scientists, or journalists. In fact, the largest number of vacancies are for retail sales clerks (5,572 openings), followed by cooks.
For South Asian men with higher qualifications this may not sound very appetising: Canada needs caregivers (nannies), cashiers, and cooks – not computer scientists.
Canada’s higher education system produces enough highly educated and trained professionals to fill the entry level positions in engineering and applied sciences. The Canadian labour markets demand skilled trades (plumbers, electricians, and truck drivers), retail sector workers, and obviously caregivers to look after the very young and the very old.
The engineers and doctors who immigrated in the past 20 years learned this bitter lesson after they landed in Canada. The new immigration system now links the aspirants to jobs, thus minimising the risk of a mismatch between immigrants’ skills and labour market needs.
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Over the past 20 years, I have met with numerous Canadian immigrants from Africa, Eastern Europe, and South Asia who claim to have been duped into immigrating to Canada. They were surprised at how hard it was to find a job, let alone pursue careers as immigrants. In fact, recent immigrants are the new face of urban poverty in Canada, which I reported on earlier in 2012.
The immigrants have, to a large extent, themselves to blame.
They applied to immigrate to Canada without researching their odds for employment. Doctors, for instance, arrived without exploring the licensing requirements to practice medicine in Canada. They are the most vocal group among the disgruntled immigrants.
The Canadian government also shares the blame for the archaic point system it used to qualify applicants for immigration. Even when Canada faced serious shortages for truck drivers (the most common profession among Canadian males), the government was busy admitting doctors and engineers.
Instead of prioritising younger applicants, the system brought in middle-aged workers, who were schooled before computers became ubiquitous. The older workers were educated, but not necessarily skilled for Canadian needs. In addition, they were set in their ways and found it hard to change habits and work ethics. The result was obvious:
Canada has the most educated cab drivers and security guards in the world.
The new regulations are not without risks and inherent shortcomings.
For instance, the aspirants with a job offer from Canada will be given priority to apply for permanent residency. The invitees will have up to two months to send in their formal application, which the Canadian government promises to process within six months. The process may take up to eight months before the worker with a job offer is allowed entry into Canada.
What employer will be willing to hold a vacancy for eight months for a worker living thousands of miles away?
Still, the new system does a better job of setting expectations for aspiring immigrants and Canadian employers. Though the critics of the system are wary of the discretionary powers assumed by the government, they must realise that when immigrant workers fail to adjust in Canada, the governments have to bear the burden of supporting the families of unemployed workers.
By prioritising those applicants whose skills are more in demand, the system improves the odds for new immigrants to succeed in Canada and not be a burden on the taxpayers.
As HSBC shows, we’ve been timid and pathetic in dealing with tax dodgers
Prem Sikka in The Guardian
The parliamentary hearing on HSBC, chaired by Margaret Hodge this week has further exposed the cosy arrangements between big business and those who are supposed to be collecting its taxes. Revelations of organised tax avoidance and even evasion don’t lead to any investigations, prosecutions and fines, it appears. And Lin Homer, the chief executive of HMRC, faced angry questioning from MPs who accused her department of failing to serve taxpayers’ interests.
While the UK dithers, other countries, notably the US, are taking meaningful action against the tax avoidance industry. In 2013 Ernst & Young was fined $123m for its past misdemeanours after admitting “wrongful conduct” over the sale of tax avoidance schemes. Some staff also received prison sentences. In 2005 KPMG was fined $456m after it admitted to a fraud that generated at least $11bn in phoney tax losses for clients. A number of the firm’s former senior personnel were jailed.
And US regulators have targeted lawyers: a former Jenkens & Gilchrist employee received an eight-year sentence and a $190m fine for promoting fraudulent tax avoidance schemes. Another was jailed for 15 years.
There have been other massive fines for tax-dodging schemes: Credit Suisse was made to pay $2.6bn; UBS $780m, and Deutsche Bank $554m. All these illustrate how the US, the supposed home of deregulation and light-touch regulation, deals with organised tax avoidance. Periodic hearings by its Senate committees have led to action by the tax authorities and the department of justice. One programme rewards individuals who expose tax problems at their workplace. Whistleblowers can receive up to 30% of the tax proceeds resulting from their information. In 2013 122 whistleblowers shared awards totalling $53m.
Britain’s efforts to recoup taxes are pathetic by comparison. As Hodge said to Homer yesterday: “One of my feelings of anger with you is that you sit there waiting for people to come. You don’t go out and police in the way other authorities are doing.”
No doubt all those addicted to tax avoidance, in whatever country, are able to game the rules and play cat-and-mouse with the tax authorities. These practices are deeply embedded in contemporary entrepreneurial culture. That’s why strong measures are needed to counter them.
But Britain lacks effective institutions and the political will to deal with the tax-avoidance industry. Hodge’s public accounts committee hearings have not been followed up with action by any government department.
The UK has a fragmented regulatory system. HMRC, the Serious Fraud Office, the Treasury, the Crown Prosecution Service, the Department of Justice, professional bodies and others are all keen to pass the buck. The overlapping structures result in duplication and waste. With an annual budget of about £35m, the SFO is incapable of fighting banks and giant law and accountancy firms.
Tax courts and tribunals have often declared avoidance schemes to be unlawful, but this has not been followed by investigations, fines or prosecutions. Despite winning some cases, HMRC has not even sought to recover legal costs from any of the parties.
One reason for HMRC’s timidity is the lack of personnel and resources. The economic case for investment to check tax avoidance is unanswerable: evidence suggests that for every £1 spent in 2013/14 by HMRC’s large business service – which deals with the UK’s largest and most complex businesses – an additional £97 was recovered. The local compliance unit, which handles smaller businesses and wealthy individuals, collected an additional £18 for every £1 spent the same year.
But it seems the government is not listening. It has cut HMRC funding, badly denting its efforts to expose wrongdoing. This leads to false economies, such as the HMRC relying on professional bodies to deal with the tax avoidance schemes promoted by big accountancy firms. This has to stop. No such firm has ever been disciplined or fined for peddling abusive tax avoidance schemes, even after the courts declared them unlawful.
We’ve heard ministers announce proposals, but these are rarely fully implemented. For example, in April 2013 the government introduced rules to ban companies and individuals who took part in failed tax avoidance schemes from being awarded government contracts. In practice, no such business has been barred.
This week’s revelations in the Guardian and the House of Commons show how flawed is our policing of tax dodgers. It’s clear these abuses will continue until, like others countries, we send out a tough signal that tax evaders will be caught – and punished severely.
Thursday 12 February 2015
Germany faces impossible choice as Greek, Spanish and Italian austerity revolt spreads
Ambrose Evans-Pritchard in The Telegraph
The political centre across southern Europe is disintegrating. Establishment parties of centre-left and centre-right - La Casta, as they say in Spain - have successively immolated themselves enforcing EMU debt-deflation.
Spain's neo-Bolivarian Podemos party refuses to fade. It has endured crippling internal rifts. It has shrugged off hostile press coverage over financial ties to Venezuela. Nothing sticks.
The insurrectionists who came from nowhere last year - with Trotskyist roots and more radical views than those of Syriza in Greece - are pulling further ahead in the polls. The latest Metroscopia survey gave Podemos 28pc. The ruling conservatives have dropped to 21pc.
The once-great PSOE - Spanish Workers Socialist Party - has fallen to 18pc and risks fading away like the Dutch Labour Party, or the French Socialists, or Greece's Pasok. You can defend EMU policies, or you can defend your political base, but you cannot do both.
As matters stand, Podemos is on track to win the Spanish elections in November on a platform calling for the cancellation of "unjust debt", a reversal of labour reforms, public control over energy, the banks, and the commanding heights of the economy, and withdrawal from Nato.
Europe's policy elites can rail angrily at the folly of these plans if they wish, but they must answer why ex-Trotskyists threatening to dismantle market capitalism are taking a major EMU state by storm. It is what happens when 5.46m people lack jobs, when 2m households still have no earned income, and when youth unemployment is still running at 51.4pc, and home prices are down 42pc, six years into a depression.
It is pointless protesting that Spain's economy is turning the corner, a contested claim in any case. There comes a point when a society breaks and stops believing anything its leaders say.
The EU elites themselves have run their currency experiment into the ground by imposing synchronized monetary, fiscal, and banking contraction on the southern half of EMU, in defiance of known economic science and the lessons of the 1930s. It is they who pushed the eurozone into deflation, and thereby pushed the debtor states into accelerating compound-interest traps.
It is they who deployed the EMU policy machinery to uphold the interest of creditors, refusing to acknowledge that the root cause of Europe's crisis was a flood excess capital flows into vulnerable economies. It is they who prevented a US-style recovery from the financial crisis, and they should not be surprised that such historic errors are coming back to haunt.
The revolt in Italy has different contours but is just as dangerous for Brussels. Italians may not wish to leave the euro but political consent for the project but broken down. All three opposition parties are now anti-euro in one way or another. Beppe Grillo's Five Star movement - with 108 seats in parliament - is openly calling for a return to the lira.
Mr Grillo proclaims that Syriza is carrying the torch for all the long-suffering peoples of southern Europe, as it is in a sense.
"What’s happening to Greece today, will be happening to Italy tomorrow. Sooner or later, default is coming," he said.
Premier Matteo Renzi staked everthing on a recovery that has yet to happen. He is running out of political time. Deflation is overwhelming the fiscal gains from austerity. Italy's public debt has jumped from 116pc to 133pc of GDP in three years. The youth jobless rate is 44pc and still rising. Italian GDP has fallen 10pc in six years, and by 15pc in the Mezzogiorno. Italy's industrial production has dropped back to the levels of 1980.
The leaders of Spain and Italy know that their own populists at home will seize on any concessions to Syriza over austerity or debt relief as proof that Brussels yields only to defiance. They have a very strong incentive to make Greece suffer, even if it means a cataclysmic rupture and a Greek ejection from the euro.
Yet to act on this political impulse risks destroying the European Project. Europe's Left would nurture a black legend for a hundred years if the first radical socialist government of modern times was crushed and forced into bankruptcy by Frankfurt bankers - acting at the legal boundaries of their authority, or beyond - choosing to switch off liquidity support for the Greek financial system.
It would throw the Balkans into turmoil and probably shatter the security structure of the Eastern Mediterranean. It is easy to imagine a chain of events where an embittered Greece pulled out of Nato and turned to Russia, paralysing EU foreign policy in a self-feeding cycle of animosity that would ultimately force Greece out of the union altogether.
The charisma of the EU - using the Greek meaning - would drain away if such traumatic events were allowed to unfold, and all because a country of 11m people wanted to cut its primary budget surplus to 1.5pc from 4.5pc of GDP and shake a discredited Troika off its back, for that is what it comes down to.
One is tempted to cite Jacques Delors' famous comment that "Europe is like a riding bicycle: you stop pedalling and you fall off" but that hardly captures the drama of what amounts to civil war in a union built on a self-conscious ideology of solidarity.
"The euro is fragile. It is like a house of cards. If you pull away the Greek card, they all come down,” warned Greece's finance minister Yanis Varoufakis.
“Do we really want Europe to break apart? Anybody who is tempted to think it possible to amputate Greece strategically from Europe should be careful. It is very dangerous. Who would be hit after us? Portugal?" he said.
George Osborne clearly agrees. The worries have been serious enough to prompt a one-hour Cobra security meeting. "The risks of a miscalculation or a misstep leading to a very bad outcome are growing,” said the Chancellor.
Currency guru Barry Eichengreen - the world's leading expert on the collapse of the Gold Standard in 1931 - thinks Grexit might be impossible to control. "It would be Lehman Brothers squared,” he said.
This is not the view in Germany, at least not yet. The IW and ZEW institutes both argue that Europe can safely withstand contagion now that it has a rescue machinery and banking union in place, and must not give in to "blackmail".
Such is the 'moral hazard' view of the world, the reflex that led to the Lehman collapse in 2008. "If we knew then what we know now, we wouldn't have done it," the then-US treasury secretary Tim Geithner told EMU leaders in early 2011, the first time they were tempted to eject Greece.
The fond hope is that the European Central Bank can and will smooth over any turbulence in Portugal, Italy and Spain by mopping up their bonds, now that quantitative easing is on the way. Yet the losses suffered from a Greek default would surely ignite a political firestorm in Germany.
Bild Zeitung devoted two pages this morning to warnings that Grexit would cost Germany €63bn, or much more once the Bundesbank's Target2 payments though the ECB system are included. The unpleasant discovery that Germany's Target2 exposure can in fact go up in smoke - despite long assurances that this could never happen - might make it untenable to continue such support.
It is unfair to pick on Portugal but its public and private debts are 380pc of GDP - the highest in Europe and higher than those of Greece - making is acutely vulnerable to toxic effects of deflation on debt dynamics.
Portugal's net international investment position (NIIP) - the best underlying indicator of solvency - has reached minus 112pc of GDP. Public debt has jumped from 111pc to 125pc of GDP in three years. The fiscal deficit is still 5pc. The country's ranking in global competitiveness is close to that of Greece.
"The situation in Portugal is very different," says Paulo Portas, the deputy premier. Sadly it is not. Once you violate the sanctity of monetary union and reduce EMU to a fixed-exchange system, the illusion that Portugal is out of the woods may not last long. Markets will test it.
Only two people can now stop the coming train-wreck. Chancellor Angela Merkel and her finance minister Wolfgang Schauble, a man who masks his passion for the EU cause behind an irascible front.
Syriza have made a strategic blunder by turning their struggle into a fight with Germany, demanding Nazi war reparations, and toying with the Russian card at the very moment when Mrs Merkel is locked in make-or-break talks on Ukraine with Vladimir Putin.
Mr Varoufakis is trying to limit the damage, praising Mrs Merkel as the "most astute politician" in Europe, and Mr Schauble as the "only European politician with intellectual substance" - a wounding formulation for the others. He has called on Germany to cast off self-doubt and assume its roll as Europe's benevolent hegemon, almost as if he were evoking the glory days of the Holy Roman Empire when pious German emperors stood as guarantors for Christendom.
This is the only pitch that will work. Angela Merkel has risen above her narrow East German outlook and her fiscal platitudes of the early crisis to emerge as the soul-searching Godmother of Europe and the last credible defender of its unity. But even Mrs Merkel can be pushed too far.
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