Taxation made fun

The other book I left half-finished before our holiday was Rebellion, Rascals and Revenue by Michael Keen and Joel Slemrod. Believe it or not this is a very jolly book about taxation – covering textbook issues such as tax design, tax burden, tax administration etc. The underlying message about the economics is: it’s complicated. Indeed, it isn’t just about economics, but tightly intertwined with politics and power. The implicit follow-on message: there cannot be an ideal tax system good for all time. Indeed the book ends with the challenges posed by globalisation and digitalisation, suggesting some possible solutions – even hinting at the prospect that land value tax is one of these.

The fun comes in through the many historical episodes of taxes going wrong. This makes it a kind of tax version of the wonderful Crewe and King Blunders of Our Governments, which I always put on my public policy economics reading list. The book takes us from medivaeval times to the present and around the world (albeit with a US-UK bias). The knowledge and range of the authors is impressively encyclopaedic, and the quality of the writing is superb.

So I greatly enjoyed reading the book with the slight reservation that it isn’t clear who the intended audience is. At 500 pages with detailed footnotes it is a bit long for the general reader, unlikely to get picked up in airport bookshops (remember those?) I could see recommending sections to students for a bit of light relief as well as a non-technical account of issues they are covering in their public finance courses; but it isn’t a text book. There isn’t a discernible narrative, chronological or analytical arc – it’s episodic and didn’t seem to suffer from my reading it in separate chunks. Having said that, the book will answer any question you might ever have had about taxation in principle or practice and is highly entertaining too. What a combination.



The history – and future – of American capitalism

Reading Jonathan Levy’s Ages of American Capitalism: A History of the United States has been quite a commitment: over 700 pages of text, plus notes, in hardback. The sheer weight militated against my taking in the grand sweep if its ambition, as I had to read it sitting at home propped on cushions. Nevertheless, it was well worth it.

As the title suggests, the account is organised into different ages: commerce (early days from late 17th century, and the role of slavery); capital (post Civil War to Fordism and the Depression); control (New Deal & postwar golden age); chaos (1980 on). The organising idea is the changed relationship between state and business in each of the eras, but importantly that the state, and political decisions, always ultimately determined the character of capitalism. The private sector – titans such as Morgan and Ford – clearly made a massive contribution to shaping US industrialisation through their business model choices, union-bashing and personal force of will; but they were not writing the story of capitalism on a blank sheet of paper. Government decisions and political forces constrained them and tamed them. And in each of the eras, there were distinct political visions, starting with the conflicting Hamilton and Jefferson visions.

This political economy framing made the final section the most interesting to me, given the many straws in the wind indicating that the 2020s will prove another junction between eras as belief in the “Magic of the Market” (Chapter 19) evaporates. This isn’t to say the Biden presidency will form the template for a new era – and indeed the book stops with the post-GFC recession – but rather that the Reaganite/Thatcherite order has become a disorder.

As in any Big Book, there are lots of interesting details and eye-catching turns of phrase. The superior logistics of the Union Army for example, involving vast military contracts for provisions and even railroad-building: “A highly functional political economy of corruption helped the Union win the war.” The early signs of the importance of the changing geography in US economic development as NASA and companies such as IBM opened facilities in Alabama in the late 1950s, signalling the rise of the sunbelt. The role of JP Morgan in creating forward-looking corporate valuations in the late 19th century merger movement.

There are points at which it seems like the book isn’t 100% in control of the economic terminology. For instance, Levy frequently uses a phrase about deposits ‘pyramiding into New York’ as if it’s a technical term of art. And there are a few scattered graphs that don’t add much to the words – the reproduced paintings are better illustrations of the points being made, be it about the frontier or 1960s consumerism. These are minor quibbles.

The book ends: “I have emphasized that American capitalism is an especially forward-looking economic system, in which expectations of the future play a prominent role in determining the present.” I think this statement is always true, and that it’s the balance between optimism about the future and nostalgia for the past that shapes an economy. The same page later lights on what is particularly distinctive about the US: “its pronounced historical amnesia.” And as Levy concludes, now is the moment for a better imagined future to come into play. Over to the politicians, Biden and the not-yet dormant spectre of Trumpism.



Finance and the world

One of the highlights of my career as a  financial journalist was a trip to the Chicago Board of Trade in its open outcry days. It must have been around 1993. I can still remember the physical sensation caused by the explosion of the noise of human voices shouting orders in the huge trading pits as soon as the bell rang. It was an extraordinary experience. But one shouldn’t romanticise open outcry. And as Donald Mackenzie records in Trading at the Speed of Light, one CME trader said to him after the closing bell had rung (this was in 2000): “Look at my glasses. They’re all dirty.” Flecked with spittle from the shouting melee.

I loved this book. I’ve been a keen follower of Prof Mackenzie’s research on high frequency trading since his early articles in the London Review of Books as well as a previous book, An Engine, Not A Camera. Prof Mackenzie describes his research endeavour as ‘material political economy’, and it concerns the interaction between the physics and (literal) construction of financial markets, and specifically HFT, and regulatory or political decisions, or power relations.

HFT is a world which is Einsteinian: the speed of light is the constraint on trade, and what traders (human or algorithmic) know about the market is determined by their physical location and physical connectivity: where are they, to the millimetre; how close to a geodesic curve is their communications connection (and is it fibre optic or wireless or microwave); is it raining (which interferes with certain parts of the radio spectrum more than others); to what extent have they programmed trading activities into hardware (chips and C++) for speed?

I’ve always been deeply fascinated by the physical dependencies and consequences of the online world. For example, I was right to predict in The Weightless World that – rather than the death of distance – digitalisation would enhance the agglomeration effects that concentrated people in certain places (we will see if this changes post-pandemic but I’d still reckon not.) Currently I’m somewhat preoccupied with where the internet is, and with the huge physical investments Big Tech companies have made, the weight of digital activity on climate and minerals.

Trading at the Speed of Light is an amazing, detailed account of why material reality matters for virtual outcomes, and conversely, in the financial markets. Everybody with the slightest interest in modern finance should read it (Prof Mackenzie helpfully flags sections that are technical enough to be readily skipped). The book is based on years’-worth of interviews and attending conferences and visiting remote data centres and masts, snapping photos.

The book describes the arms-race of speed and pushing ever-closer to physical limits. A key interview quotation appears mid-way: “I don’t think there’s any other industry than the finance industry that can pay for it ….It’s mind-numbing to look at this whole industry where you have a lot of people with extended training that spend night and day shaving nanoseconds. Where, if you could put that brainpower to something else, maybe somehthing different……”

Indeed. And yet the HFT we have today is the product of decisions taken by people, politicians persuaded by lobbyists. One of the things I learned from the book is that forex trading remains far more artisanal than share trading, albeit still automated. Alas, this was because of the political power of the banks involved rather than anybody’s deep foresight. Human decisions shape markets shape the world, but the consequences are rarely if ever forseen.

Who knows where it will all end (although, presumably, not well). The book ends by pointing out that ‘material political economy’ is the right lens to turn on both crypto (energy-devouring, CO2-spewing monsters) and the world of Big Tech with its datacentres and algorithmic advertising market. At least in these two cases, regulators are perhaps more aware of the societal challenges than their equivalents were in the early days of algorithmic share and futures trading. But it’s a good while since financial markets served their societies rather than predating on them.




White elephants and icons

I just read a marvellous 1980 book, Great Planning Disasters by Peter Hall. The first half of the book consists of specific case studies. To qualify, the cases have to have been costly, involved processes of planning by public authorities, and have been perceived by many people to have gone wrong. Those included are London’s third airport saga (indeed), London’s ‘motorways’ (no, they don’t exist),  Concorde, San Francisco’s BART system, and the Sydney Opera House. Also included are two schemes that looked like they would be disasters but turned out not to be: California’s new university campuses and the British Library.

One of the interesting things about the book is having an additional 40 years of hindsight. The London airport saga continues, with Heathrow now having not just a 4th and indeed a 5th terminal but still not an additional runway. Stansted has become London’s 3rd airport, sort of, though we have the bijou London City as well. Concorde alas is no more: I remember still the exhilaration the crowd I was in felt at an open air concert in Kew Gardens felt when it flew overhead toward Heathrow, after the announcement the small fleet would be retired. The British Library has been a clear success. The Sydney Opera House had to have a major refurbishment. But as I ask my students when we discuss cost benefit analysis, do you think it should never have been built: is it an icon or a white elephant?

The second part of the book draws out the themes from the case studies, discussing it from the perspective of the actors and their incentives: affected communities, bureaucrats and politicians. One theme in all the case studies is that major projects take a long time to conceive, plan, approve and fund, and during that time political actors change, as does the zeitgeist. Individuals can have a big impact. One striking example is that an influential and forceful advocate of locating the new British Library next door to the British Museum (where he was chair of trustees) became an influential and forceful advocate of its actual site next to St Pancras when he was made chair of the new national libraries’ board. Technology changes too, costs rise – always – and demand forecasts over decades are almost sure to be wrong, albeit in an unknown direction.

There is no easy answer to the conundrum of how to avoid great disasters. The book recommends taking care with forecasting techniques, having regard to distributional consequences (and how this affects the politics), and communicating the uncertainties. I think the conclusion I draw, having been thinking about this, is that planning big projects is a political, not merely a (complicated) technical, decision. That makes two things important: building enough consensus, and aligning all the interventions that could make a project a self-fulfilling success. Oh, and multiplying the initial cost estimates many times over, except not too much to scare people from approving and investing in the first place.



A brace of Leviathans

As welcome distraction from the misery of not being able to see any close family at Christmas after all, I’ve read (late, I know) The Narrow Corridor: How Nations Struggle for Liberty by Daron Acemoglu and James Robinson.

The basic argument is well known. Inspired by Hobbes’ Leviathan, they argue that nations experience a dynamic whereby there is a sort of saddle path (a narrow corridor) between not enought government (‘absent Leviathan’) and too much (‘despotic Leviathan’). To stay in the corridor (‘shackled Leviathan’), there needs to be a balance of power between government (which has to be strong enough to be effective) and society (which has to be strong enough to prevent government tipping off the path in either direction. Slightly oddly, they call this the Red Queen effect after the on-the-spot race between Alice (in Wonderland) and the Red Queen – odd because it is never made completely explicit that they’re referring to a dynamic process rather than an adequate balance. I infer the former, but it’s implicit in the examples that make up the bulk of the book.

For there is a whistle stop tour of pretty much all of recorded human history. I’m not sure this works well, although at least the book is only a third of the length of Thomas Piketty’s Capital and Ideology, which came with its own tote bag. I have to confess I started to read the latter but was not distressed to find it quarantined in my office in the March lockdown. The first section of that is all history. It’s fantastic that top economists have discovered history of course, but it’s difficult to get the right focal length – what’s the right amount of detail to inform readers without it becoming classic economic imperialism? I did enjoy reading the book, but personally, I’d have edited down The Narrow Corridor’s capsule histories.

Other quibbles. The book seems to demonstrate the struggle for stability and absence of conflict at least as much as for liberty, despite the subtitle and blurb emphasising liberty only. Hobbes was more in the territory of order versus anarchy. There’s even a hand grenade on the paperback cover. And, having spent most of the book presenting the three Leviathans as exhausting the possibilities (there’s a neat diagram), the ‘paper Leviathan’ is introduced to deal with countries that govern despotically and at the same time incompetently – think some Latin American or African states. And perhaps some formerly-shackled Leviathan countries heading in that direction…..

Having said all this, well worth a read, as well as a useful reminder that there have been dark times before and yet things go on.