economic situation is dire

[Dr_Pangloss]

It's kind of natural on the one hand. The same is true of many industries, defence, or transport or whatever. Obviously you get people who know stuff about stuff being involved in advice and policy and things like that.

Equally it's true that sometimes these people are sort of ingrained in a) doing things the way they've always been done and "looking after" former colleagues or industires they used to work with.

Most people who work in an area will be able to recount the staggering level of misunderstanding and ignorance of "other people" (not involved in their line of work) towards accounting/defence/roads/railways/air travel/health or whatever.

It's the nature of the world. There is no perfect solution.

A 'great' example of this is the FSA, you're hardly going to come down on your mates too hard for mis-behaviour.

[peterms]

When I posted similar comment about Gov't needing to do measures to plug the loopholes and slash tax avoidance and evasion I got told it was bollocks, didn't I?

No!

The comment I made, if that's what you mean, was in respect of the article saying that companies have a duty to shareholders to dodge tax.

[Enda]

I don't think any harm to the discipline of economics would be done if most of the equilibrium 'thinking' were thrown out all together. Macro would be better off with a balance sheet approach and agent based modelling.

I think you've the wrong notion of equilibrium. There are equilibria in agent based models too (which are almost always DSGE models). Some have equilibria, some don't.

If some model has no equilibrium, then its dynamics are going to be determined exclusively by the assumptions you make about the agents. There's no "solution" to the model, so it's all in the dynamics. That's fine, but it's hard to learn anything from the chaos that ensues, since it's always determined by your assumptions. Or, at least, nobody has yet showed there's a lot to be learned from this.

If some model has an equilibrium, and it's not reached, then you need to explain why it's not reached. (Note you need some notion of equilibrium before you ask this question.) That's a very interesting question. We could learn a lot from that. Nobody has answered it in general.

There's an interview with Andy Haldane which is quite interesting on models and their failure. He doesn't mention Paul Ormerod by name, but he's one of the people who have been writing about network effects, which people like Steve Keen are picking up on.

I research network effects. There is a large literature on the subject. There is brilliant research being done on networks. It's not being done by Steve Keen. (Not really by me, either.)

In general I find that the more any given economist disputes Walrasian equilibrium, the sharper they are.

What do you mean "disputes"? Nobody thinks that the assumptions required to reach an equilibrium can be, and regularly/almost always are, violated.

Walrasian equilibrium simply does not stand up to logic

Ah here. Of course it does. It holds under the assumptions it requires.

indeed I would say that we cannot even say that market processes necessarily generally move towards equilibrium.

Nobody does!

The dynamics of "any given point" to/from equilibrium is an enormous area of research. There are plenty of interesting results. Few of them are simple to explain, and none of them have permeated to undergrad texts yet. (As I said before in this thread, undergrads find equilibrium difficult enough. Trying to explain saddle paths/sink points/whatever would be a wasted venture.) Nobody is claiming that markets necessarily move toward equilibrium.

[peterms]

I research network effects. There is a large literature on the subject. There is brilliant research being done on networks. It's not being done by Steve Keen.

I don't think Keen would claim to be doing that. That's why I referred to him "picking up on" the work done by others. Same for Haldane.

But on a more general point, relating to your specific experience: you teach DSGE models, and research network effects.

The models which currently dominate economics as a profession are principally DSGE, it seems.

And mainstream economic thinking failed so dismally in the last few years partly because the models in use did not allow for network effects, as Haldane points out.

You presumably don't think there is a contradiction between DSGE modelling and network effects? But why?

[Enda]

(For the record I neither teach nor particularly like DSGE models. I'm a micro man, myself.)

(Except between my legs.)

But no, I see no contradiction in them at all.

I can't think of a way of summarising why without a boring example of DSGE. A DSGE model has many moving parts. Say you want to model consumption, investment, and output. Then you have one equation for how consumption depends on investment and output. You have one equation for how investment depends on consumption and output. You have one equation for how output depends on consumption and investment. That's three equations and three unknowns, which is fine. The stochastic part is that there is some "shock" that comes along and, say, blows up half your investment every now and again. That's also fine. Pick whatever "shock" you want and see how consumption, investment, and output react to it.

The key element of networks is that everyone affects everyone else. You buy a phone/join Facebook and all your mates are now more likely to buy phones/join Facebook than they were, since they like talking to you. And when they buy a phone/join Facebook, you spend more time on the phone/Facebook than you otherwise would since you like talking to them. In jargon terms, you get positive (or negative) feedback loops.

There's nothing stopping you incorporating this type of behaviour into your consumption equation in the DSGE.

And there's nothing stopping you incorporating an "Oh shit, that other bank just stopped lending. Maybe we should too." type behaviour into your investment equation either.

Edited to add: fair enough on the Keen thing. I'd suggest there are more interesting people to listen to/read about research though.

Edited November 1, 2012 by Enda

[leviramsey]

What do you mean "disputes"? Nobody thinks that the assumptions required to reach an equilibrium can be, and regularly/almost always are, violated.

Pretty much anybody who tends toward Menger instead of Walras will reject those assumptions.

Steve Horwitz (Microfoundations and Macroeconomics):

From an Austrian perspective, the various schools of thought in macroeconomics have more similarities than differences. The similarities include... a link to various equilibrium-bound microeconomic foundations since [the Marginalist] revolution....

New Classical economics took Friedman's work to the next step, by providing two important advances over the Keynesian model.... New Classicism also seriously addressed the issue of microfoundations by asking whether Keynesian and monetarist macroeconomic theories rested on behavioral assumptions that were inconsistent with modern microeconomics. By substituting Muth's rational expectations for the assumption of perfect knowledge, Lucas provided a way to render labor markets, and macroeconomics more generally, consistent with general equilibrium theory. Just as agents were assumed to maximize utility in micro theory by using all of the available relevant information, so we could transfer that model to labor markets and substitute probability distributions of future events for the more static assumption of perfect knowledge. The brilliance of Lucas was to connect macroeconomics with the profession's accepted microeconomic framework.

From an Austrian perspective, however, Lucas chose the wrong microfoundations. Where Lucas turned to Walrasian general equilibrium theory, Austrians would turn to Mengerian market-process theory. The attempts by New Classical economists to couch all apparent macroeconomic problems as equilibrium outcomes ring false to Austrians. For Austrians, existing prices and quantities are virtually always disequilibrium values and the market is seen as the process by which producers and consumers are attempting to better coordinate their behavior by using, and in turn affecting, that price and quantity information....

An important point of tangency between the approach outlined in this book and New Keynesianism is the issue of the stickiness of prices. Much of New Keynesianism is focused on providing the microfoundations for a macroeconomics of sticky prices. The objection it has against New Classicism is not so much the assumption of rational expectations, but the assumption of perfectly flexible prices built into the general equilibrium modeling strategy. What makes New Keynesianism Keynesian is its insistence that real-world prices are not fully flexible, and what makes it new is that this stickiness can be understood as a rational, utility-maximizing strategy by market agents. Both the Austrian theory of the business cycle and the monetary disequilibrium theory of deflation also involve prices that are less than perfectly flexible. However, for Austrians and the monetary disequilibrium theorists, the stickiness of prices is a positive proposition about the way a dynamic market process unfolds, whereas for the New Keynesians, the stickiness of prices represents not only a positive proposition but a normative concern. Both the New Keynesians and the New Classicals agree that perfectly flexible prices are the ideal, but they differ over how closely markets can approach that ideal and whether government policy can make prices more flexible. From a Mengerian perspective, this normative concern is misplaced: prices are inherently less than perfectly flexible and damning them in comparison to the unachievable vision of general equilibrium theory will only lead to serious errors in theory and policy....

As briefly surveyed earlier, neoclassical approaches to the issue of microfoundations in macroeconomics usually begin by constructing some sort of utility maximization/equilibrium model (incorporating rational expectations) and then proceed to show how various macroeconomic phenomena can be derived from this microeconomic model. Because of the wide acceptance of general equilibrium theory, most mainstream discussions of microfoundations spend relatively little time exploring exactly what should constitute those foundations: it is assumed that an equilibrium model is the way to do it. By contrast, one of the defining features of Austrian economics is its rejection of Walrasian equilibrium theory as the proper theoretical framework for understanding the market process. Rather than Walras, Austrian economics begins with another marginalist revolutionary, Carl Menger. An Austrian approach to macroeconomics will be essentially Mengerian in its emphasis on knowledge, process, and subjectivism....

Austrians are not the only group in contemporary economics that questions the microfoundations of mainstream macroeconomics. David Colander, in his introduction to Beyond Microfoundations: Post Walrasian Macroeconomics has rightly characterized much of modern macroeconomics as Walrasian in the sense that it uses a "comparative static model that assumes the existence of a unique aggregate equilibrium unaffected by dynamic adjustment processes." This approach reached its apex in New Classical economics with its explicit connection to general equilibrium microfoundations. The papers in the aforementioned collection all attempt to outline a vision of a macroeconomics not wedded to what the authors believe to be traditional Walrasian foundations.

It's worth noting, however, that Colander chose the name Post Walrasian. In many ways, the contributors are still asking Walrasian questions but answering them in more complex and subtle ways. For example, one of the distinguishing characteristics of a Post Walrasian economics is conjecturing that "the solution to a system of equations as complex as is necessary to describe our economy has multiple equilibria and complex dynamics." This is in contrast to the single equilibrium and simple or nonexistent dynamics of Walrasian approaches. The Walrasian vision of an economic system described by the concept of equilibrium and simultaneous equations is retained, but Post Walrasians believe that "the mathematics used in Walrasian macroeconomics is too simple to correspond to complex reality."

By contrast, an Austrian approach to microfoundations might more accurately be described as non Walrasian or, more in line with Colander's terminology, Post Mengerian. A Mengerian understanding of the market process rejects the claim that an economy can be fruitfully understood through the use of simultaneous equations and equilibrium constructs. The market is a dynamic process of learning and discovery that cannot be spelled out ex ante and evolves and changes as the human actors learn, grow, and change. The Austrian approach rejects equilibrium theory as a description of actual economic events (although some Austrians would retain it as an unreachable end point of economic activity)....

The central themes of Menger's books (the Principles and the Investigations) are spontaneous order and subjectivism. Expanding on the central idea of the discipline of economics since Adam Smith, Menger was concerned with explaining how desirable and orderly patterns of outcomes could emerge without direct human design intending them. Some economists have argued that general equilibrium theory is also attempting to provide an elucidation of Smith's "invisible hand". However the differences between Walrasian and Mengerian approaches are significant and center upon the way that Menger understood the problem situation of the individual actor (i.e. subjectivism) and his understanding of how various institutions emerged to enable individuals to transcend their own ignorance and uncertainty (i.e. spontaneous order).

THe first chapter of Menger's Principles contains a section on "Time and Error", where he discusses their influence on economic cause and effect. Time plays a central role, because all productive processes involve "becoming" and change and are thus taking place in time. Error enters when we consider that capital goods are capital only because their owners believe that they can successfully produce consumer goods that will be valued by economic actors. Those beliefs may be incorrect and such errors will be revealed by market discovery processes. This emphasis is part and parcel with Menger's broader subjectivism.

The emphasis on time and error is also linked with the Austrian skepticism about general equilibrium models and the equilibrium orientation of neoclassical economics more broadly. If human actors are accurately described as having less than perfect knowledge, then equilibrium approaches premised on assumption of perfect knowledge will be problematic. In the Mengerian vision, market actors use their fragmentary and often inchoate knowledge to form their divergent expectations of the future and thereby appraise the value of existing goods of various orders in terms of their ability to produce goods they perceive will be valuable in the future. Market prices are a key element of that process. Because they are also the product of a process that emerges from the divergent expectations, existing market prices are embedded with the erroneous expectations and judgments of the previous set of suppliers and demanders. The same will be true of the prices that emerge from the current "round" of economic activities. As long as people have imperfect and/or different knowledge, the prices that will emerge from human choice processes will not be equilibrium prices and therefore cannot be error-free....

[Risso]

Oh christ, this has gone back to being an economic theory thread between people doing nothing other than trying to show off.

[CI]

I hear Woolworths are in trouble

[snowychap]

Oh christ, this has gone back to being an economic theory thread between people doing nothing other than trying to show off.

That comment seems rather out of order.

[CI]

Comet again on the brink

6,000 jobs at risk

[chrisp65]

Comet has no usp, there is no reason to go to Comet other than to get a price comparison and move on.

Their goods aren't unique in anyway, they don't have 'local' stores, they don't make you feel warm and fuzzy. Shoppers have a number of better alternatives. If they like to drive out on a Sunday and pick up a dishwasher, Currys will be at least equivalent. If they want the cheapest price, the interweb trumps them. If they want the feeling of old school service and somewhere to go back and moan if it breaks, they have John Lewis. If they want to try a little haggle in a local High Street store, there are department stores and Euronics. If they just need a replacement white goods item with no interest in the name on the box or the delivery van and it's 7:00pm, then thank you tesco / asda. There is no aspect of Comet that I can think of that isn't done better by someone else.

It's a shame for the staff, but they are indeed in the pooper.

[omariqy]

Agreed. We were having this discussion at work and came to same conclusion. They have usually been cheaper then currys/dixons/JL but compared to the net there is no winner. Without wanting to sound like a vulture, I wonder if this will mean some bargains to be had?

[peterms]

http://www.youtube.com/watch?v=arKmquuJJY4&feature=youtu.be

[snowychap]

The Torygraph

Margaret Hodge, chairman of the Public Accounts Committee, is facing embarrassing revelations over the tax affairs of her family company just days before she is due to lead the grilling of US companies over controversial tax arrangements.

The Labour MP has been one of the fiercest critics of tax avoidance by companies such as Starbucks, Google and Amazon. However, she is likely to face questions over the limited tax paid by Stemcor, the steel trading company in which she owns shares and which was founded by her father and is run by her brother.

Analysis of Stemcor’s latest accounts show that the business paid tax of just £163,000 on revenues of more than £2.1bn in 2011. However. it is not known whether the company – which made profits of £65m – used similar controversial tax avoidance measures criticised in the past by Mrs Hodge.

Stemcor’s tax bill to the exchequer equates to just 0.01pc of the revenues it booked through its UK-based business. In accounts filed with Companies House, Stemcor revealed that despite generating about one third of its revenues in Britain, its UK tax contribution made up only 2.7pc of the tax the company paid globally.

Stemcor was founded by Mrs Hodge’s father Hans Oppenheimer more than 60 years ago.

Today, the business claims to be the sixth largest private UK company by turnover. Last year the company, which employs 2,000 people in 45 countries, generated sales of £6bn from trading about 20m tonnes of steel.

The majority of Stemcor’s shares are still controlled by the Oppenheimer family and Mrs Hodge declares a “registrable shareholding” in the company, which is run by her brother Ralph Oppenheimer, executive chairman.

Speaking to The Daily Telegraph, Mrs Hodge defended Stemcor’s behaviour and said that the company had “assured” her it paid “every penny of tax that is owed”, adding that she was only “a very small shareholder”.

“Clearly, I have asked them the question,” said Mrs Hodge. “They have always promised that they do absolutely nothing to avoid tax. I would be very mad if I found out differently.”

Mrs Hodge said unlike other companies under the spotlight, Stemcor did not try to shield profits or “hide information” and that was the difference between Stemcor and Starbucks.

However, when pressed about the details of why so little tax was paid by Stemcor despite the billions of pounds it makes, Ms Hodge said that she had not done “enough detailed work” and did not have the information.

On Monday, Mrs Hodge will chair a hearing at which senior executives from Starbucks, Google and Amazon will be questioned on their tax affairs. The US companies, along with Facebook, were recently shown to have paid just £30m of tax between them despite generating £3.1bn of British sales in the past three years.

Mrs Hodge has led much of the criticism of these companies over the ways in which they minimise their tax bills. Mrs Hodge previously said: “There is a growing anger among ordinary people who pay their taxes that the system is not fair. That big corporates and the rich find ways to avoid tax. It may be legal but it is not moral.”

A spokesman for Stemcor defended the company’s tax policy and said it paid more than many of its peers. “In the past three years, a total of £14m of corporation tax has been paid by Stemcor in the UK. Stemcor’s effective tax rate internationally in the last three years has been over 30pc.”

The spokesman added that Stemcor was “happy” to provide more detail “about its tax affairs to the media if requested” and that it was “proud of the company’s contribution to the UK economy”.

“Stemcor is almost unique among international trading companies in that it still maintains its headquarters in the UK. Most other such companies have located themselves in low tax jurisdictions, while still having sizeable operations in London. Stemcor’s shareholders refuse to countenance such a move,” the spokesman said.

[peterms]

Not forgetting Mr O

Why exactly would he be the right person to crack down on taxdodging, I wonder?

George Osborne's firm made £30,000,000+ in gross profits over 3 years but paid less than 1% in corp tax.

On 18 October 2012, George Osborne updated his entry in the Register for Members' Interests (House of Commons). His entry is shown above but you can also view it in page 215 from this link (here). I thought readers would appreciate knowing what % of gross profit George's Osborne's firm pay in tax each year and also what % total tax paid is as a turnover of revenue. You can explore the finances of "Osborne & Little Group" yourself from this link (here) but for my analysis see below.

Despite having a turnover of £71 million+ over the last three years and making gross profit of £30 million+ during the same period, Osborne and Little have paid less than 1% in Corporation Tax during that 1,000+ day period. For the last full financial period on record (ending April 2011), the company paid less than 0.1% in Corporation Tax as a proportion of £9.7 million in Gross Profits. Of course, if you examine each of the three years you will see that after gross profit is calculated the accountants proceed to deduct all of that sum in various liabilities including "miscellaneous" liabilities of £1 million + and Director emoluments of £1.6 million. Corporation Tax paid in relation to turnover is set to be a hot topic at Westminster this week as the bosses of some of the biggest companies in the world will have to answer for the tiny portions of tax they pay in relation to their turnover. For more on that (see here)

[peterms]

Anyone who is unsure how much tax they should be paying has an obvious course of action open to them. Ask an accountant.

Accounting standards organisation in HMRC tax probe

The organisation that sets global accounting standards is being investigated by HM Revenue & Customs (HMRC) for failing to pay the correct income tax and national insurance contributions.

The International Financial Reporting Standards (IFRS) Foundation has been forced to set aside £460,0000 “pending final resolution and settlement” with HMRC, according to an embarrassing admission in its latest report and accounts.

The accounts show that the foundation, which is responsible for dictating accounting rules in 100 countries including two thirds of the G20, said it had already paid HMRC £24,000 while the investigation continues.

The investigation started in May 2011, according a note in accounts, and is focused on “records for inward bound expatriate staff and general compliance with employment tax - ie income tax and national insurance contributions.” The note adds: “Discussions are progressing and a final liability has not been assessed by the HMRC.”

The foundation told The Daily Telegraph that HMRC had raised questions over the tax treatment of staff that are seconded from abroad. “Such staff remain in the employment of the local standard-setter and it has been the view of the IFRS Foundation that taxation of such secondees is therefore a matter for the national standard-setter,” it said. “These are complex matters of tax interpretation where the Foundation had taken external professional advice.”

The revelation comes amid intense scrutiny on the tax arrangements of international companies and organisations. It is also awkward for an organisation that is striving to become the standard setter for all countries, despite strong criticism of the rules among some experts and politicians in the UK.

One tax consultant said: “I’m very surprised, this isn’t a “Mama and Papa Company”. It’s very embarrassing for an organisation that pontificates on how to lay out accountants gets something as simple as this wrong”...

[peterms]

Starbucks hearing:

[Risso]

Peter, why do you keep going on about tax paid as a percentage of sales or gross profit? It's utterly nonsensical. Any company in a loss making situation (of which there are plenty) will have sales and gross profit, but pay no tax. And of course you don't deduct "liabilities" from gross profit, as liabilities are a balance sheet item. If you're talking about expenses, then in the above company £8m goes on wages, pensions and directors' emoluments, on which lots of nice tax and NI will be paid. They've then paid £1m in rent, and have £600K depreciation. It really is as unremarkable a set of accounts as you could hope to see, and is only being focussed on because of who owns it. All this tax as a percentage of sales is just buffoonery of the highest order. I could link to several extremely boring companies in the UK who I know work hard, have no form of tax planning whatsoever but who struggle because the economy is up shit creek, and who pay very little corporation tax. As a result, their tax to sales or GP ratio would be very small, but that's the thing, if you don't make profits, you don't pay tax. Where exactly do you think Osborne is manipulating things above?

[snowychap]

...that's the thing, if you don't make profits, you don't pay tax...

And if you can get your accounts to show that you aren't making a profit, you don't pay it either.

That's where the difficulty arises.

People genuinely have a great deal of difficulty accepting the face value veracity of the financial statements of some of these organizations especially when some of the leaders and spokespeople for them defend paying little or no tax in one or more jurisdictions (and imply that they are not avoiding tax) by giving some meaningless international tax rate percentage.

[Risso]

Can anybody think of another company that pays a tiny percentage of its turnover in UK tax, eg £129K on turnover of £182m in the last two years? One that has an anonymous trust set up in a low tax foreign jurisdiction as a shareholder? You get the pitchforks Peter, I'll bring the petrol bombs.