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| The G7's Reckless Commitment To Mounting Debt Posted: 14 Jun 2021 09:00 AM PDT Historically, meetings of the largest economies in the world have been essential to reach essential agreements that would incentivize prosperity and growth. This was not the case this time. The G7 meeting agreements were light on detailed economic decisions, except on the most damaging of them all. A minimum global corporate tax. Why not an agreement on a maximum global public spending? Imposing a minimum global corporate tax of 15 percent without addressing all other taxes that governments impose before a business reaches a net profit is dangerous. Why would there be a minimum global corporate tax when subsidies are different, some countries have different or no VAT rates (value added tax), and the endless list of indirect taxes is completely different? The G7 "commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20 percent of profit exceeding a 10 percent margin for the largest and most profitable multinational enterprises." This entire sentence makes no sense, opens the door to double taxation and penalizes the most competitive and profitable companies while it has no impact on the dinosaur loss-making or poor-margin conglomerates that most governments call "strategic sectors." The global minimum corporate tax is also a protectionist and extractive measure. The rich nations will see little negative impact from this, as they already have their governments surrounded by large multinationals that will not suffer a massive taxation blow because subsidies and tax incentives before net income are large and generous. According to PWC's Paying Taxes 2020, profit taxes in North America already stand at 18.5 percent but, more worryingly, total tax contributions including labor and other taxes reach 40 percent of revenues. In the EU and EFTA (European Free Trade Association), profit taxes may be somewhat smaller than in North America, but total taxation remains above 39 percent of revenues. Some politicians mention corporate technology giants as the ones that pay no taxes and use an effective tax rate where they put together loss-making companies with those making a profit thus reaching an artificially low effective tax rate. Technology giants will not pay more under this new agreement, because their taxable base will not change, their profit and loss account will remain similar and, more importantly, the deductions on large investments, which are the cause of their apparently small tax payments, will not change either. The global minimum tax rate will not hurt G7 members or large technology giants, but it will devastate small and dynamic countries that need to attract capital and investment and who cannot afford to have the tax rate of global leading nations. Losing capital and investment will cripple their economy and the alleged "tax revenue benefit" of raising the minimum corporate tax will disappear. Not only small and dynamic nations will suffer from this measure, but small and dynamic corporations, because they will have less reserves to invest and grow in the future the moment they generate a profit, making them weaker. Therefore, it is a protectionist and extractive measure that benefits the ones who are already rich nations and large multinationals but disproportionately harms the small and rising nations and businesses. The Organisation for Economic Co-operation and Development (OECD) itself has warned that corporate taxes are the most harmful for growth. The evidence from the OECD study shows that "investment is adversely affected by corporate taxation through the user cost of capital." The OECD study also warns that corporate tax rates have a negative effect on firms that are in the "process of catching up with the productivity performance of the best practice firms" and concludes that "lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth." Rising corporate taxes will not reduce the debt burden. The reality of the budgets and financial position of most G7 and G20 countries shows that deficits continue to be elevated even in growth periods and after periods of tax increases because government spending rises above all revenue increases. Rising corporate taxes will not improve growth, jobs, or productivity as show by the abovementioned examples but also by our recent history, specifically in the European Union, nor generate a substantial improvement in tax revenue that, in any case, will not even scratch the surface of the existing debt. The troubling part of the G7 commitments is that on one hand they reach a unanimous agreement to increase taxes on the productive sectors while on the other hand they reach another unanimous agreement to continue spending even in the recovery "to create high-quality jobs." How are they going to create high-quality jobs if they tax the high productivity sectors and subsidize the low-productivity ones? The G7 does not seem to address rising structural imbalances, the excessive weight of government spending or the lack of success of large entitlement programs. An extremely dangerous idea is becoming mainstream: That all public spending is good and when stimulus plans fail to deliver all you have to do is spend more. All we hear is: 1) It was not enough, 2) This time will be different, 3) Repeat. The G7 concludes, "Once the recovery is firmly established, we need to ensure the long-term sustainability of public finances to enable us to respond to future crises and address longer-term structural challenges, including for the benefit of future generations." Nice words. What is the problem? It never happens. As we saw in the past growth period, governments spend more when the economy grows and even more when it is in recession. The path to public finance sustainability cannot come from constantly raising direct and indirect taxes on the productive sectors and always increase mandatory spending. It is sad, but the G7 commitments look like the recipe for a very deep crisis in the not-too-distant future.  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| Is Guaranteed Basic Income the Solution to Robots Taking Our Jobs? Posted: 14 Jun 2021 04:00 AM PDT The idea of universal basic income (UBI) is near the peak of the hype cycle. Democrat Andrew Yang made it the flagship issue of his presidential campaign. A small industry of advocates tirelessly push arguments in its favor. I will address two in this piece. The first: the claim of permanent elimination of jobs. The second: the resulting need for income to compensate for the fall in purchasing power from the lack of work. Both rely on long-discarded economic fallacies. No one doubts that robots, software, and automation eliminate some need for human labor where adopted. But the automation doomers' scenario assumes that when jobs are eliminated by automation in one place, that number of jobs are permanently gone. For this to be true, there would have to be no compensating growth in the need for labor elsewhere. The purchasing power argument says that the economy will suffer from an overall loss of demand due to the reduction in income when people are out of work. Martin Ford (futurist and New York Times bestselling author of Rise of the Robots), thinks that UBI is "the answer to job automation" because it will "ensure that consumers have money to spend—because the market economy requires that there be adequate demand for products and services." These two arguments turn out to be related through Say's law. This is the name we give to the observation that when a producer supplies a good, their action constitutes a demand for a different noncompeting good. It is correct that if the workers remained permanently unemployed, the economy would experience a lack of demand from the reduction in supply. The formerly productive workers, who are no longer producing, no longer contribute to the supply of goods. By not supplying, they remove their contribution to demand as well. However, if the workers who were made redundant in one industry can find gainful employment doing something else, then they may continue to supply, and therefore to demand. And then, there would be no systematic deficiency of demand. The UBI advocates are correct that some jobs are replaced when capital goods do the work that was done by labor. Robots are a capital good. If the same amount of output can be produced by a mix of more robots and fewer people, an industry will not offer as much employment as before. Does it follow that when one industry uses fewer workers there is no need for their services anywhere else? How would the advocates of this view explain the enormous growth in the labor force since the Industrial Revolution two centuries ago—a period characterized by increasing capital intensity? The answer is that fall in demand for labor in the more capital-intensive industries is only the start, not the end, of the story. The economist does not stop with the immediate effect of a change. The true economist analyzes how the entire system adjusts to a change. Hayek saw "the increasing concentration on short-run effects … not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilization."1 Where did the robots come from? Was there a huge warehouse of unused robots dropped by aliens? Someone had to produce the robots. The process of creating the new capital goods starts with less consumption to fund additional saving and investment. This initially creates more demand for labor in the capital goods sectors, to build the robots. This demand to some extent compensates for the loss of employment in consumer goods from spending shifted from consumption to capital goods. The creation of robots requires engineers, manufacturing, sales, marketing, and all of the other services that form a full supply chain. Jesús Huerta de Soto in Money, Bank Credit, and Economic Cycles shows how the increase in the supply of capital goods relative to labor changes the most profitable combinations of labor and capital for that industry. The lowest-cost mix then consists of more capital and less labor. More output in that industry can be created at lower cost by fewer people:
The adoption of more productive capital goods raises the productivity of labor. This means that less labor is required in that industry to produce the same quantity of goods at lower cost. Mises explains what happens following the substitution of capital for labor:
The lower costs are through the resulting price competition passed on to consumers. This is another way of saying that consumers now have a higher real wage. Consumers can buy the same amount of products—let's say shoes—as before and still have some money left over to buy something else that they previously could not afford.
This is another way of saying that when one industry becomes more productive, everyone else gets a raise. Contrary to Martin Ford, there is no need for income to generate purchasing power disconnected from production. More capital-intensive production, through lower prices, generates the purchasing power to buy the final products. But that is still not the end of the story. The ability of the workers in other industries to buy something new creates the opportunity for some businesses to expand production, or for new businesses to make new products. Without the drop in the output prices of the more capital-intensive industries, these new products would not have been affordable for these workers. The labor needed to produce those products would not have been available at a wage that would have made it profitable to produce them, because the labor would have been more urgently needed doing something else. When the labor was replaced by robots, things changed. Mises describes the process using a hypothetical product called "A" to make the point that the release of labor from some uses makes other uses economically viable:
The British Austrian school economist William H. Hutt addressed the unemployment of labor extensively in several of his books. He emphasized the importance of price flexibility. Any productive service has a value, and therefore a price, somewhere, doing something useful. Price flexibility and open labor markets are necessary in order for workers to be matched up with work that consumers value the most. When labor productivity increases in one industry, on average more goods are available for everyone to buy, but wages can still rise, or fall, in each industry or geographic area, depending on the skills of the workers in the labor market, the types of goods and services in demand, and the quantity and quality of preexisting capital goods. If the job losses occur in the increasingly capital-intensive industry, those workers must be free to offer their services in other areas where there is demand. Problems with the price system can appear to manifest as chronic unemployment. What appeared to be permanent unemployment in the British labor market of the 1930s, according to Hutt, was in reality excessively rigid and inflexible pricing in British labor markets. He blamed this primarily on labor unions, who, with government encouragement or inaction, were demanding above-market-clearing wages in many industries.6 A secondary factor was the subsidization of unemployment through the welfare system, which encouraged unemployed workers not to seek employment, and not to accept a wage offer when one was on the table. A UBI scheme does not replace the demand from the unemployed workers. According to Say's law, demand originates with production. Paying people not to produce destroys their ability to demand. Hutt cites the nineteenth-century economist Frederick Lavington's observation that the consumers' proper name is "other producers."7 Handing out money can only transfer demand created by the people who remain in the labor force. If the program is paid for with money printing then the resulting inflation only transfers purchasing power from those workers who had sold their services for money and not yet spent it. The unemployed can only create demand by returning to work, by becoming producers again. The traditional means for people to obtain income—by earning it—is still the best way, even with robots.
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