The Sunday Times April 10, 2022 9
BUSINESS
J
oe Biden has made his latest bid to
have his name sit beside that of
Franklin Roosevelt in America’s
history books — assuming history
remains in the curriculum of our
universities. He is proposing to
tax and tax, spend and spend.
Pips can be heard squeaking
throughout the land. Squeals of delight
can also be heard from lobbyists,
lawyers and accountants preparing to do
battle with the Internal Revenue Service
on behalf of clients too well-off to
demand service on a pro bono basis.
The president is proposing to spend
$6 trillion in the 2023 fiscal year
beginning on October 1. That is 36 per
cent more than was spent in 2019, the
last pre-pandemic year, and will add
$1.4 trillion to the national debt, already
well above $30.3 trillion, twice the level
a decade ago and 130 per cent of GDP, up
from about 99 per cent a decade ago.
The administration’s ten-year budget
plan calls for a highest-ever $2.5 trillion
in new taxes, with about $361 billion
generated by a “billionaire minimum
income tax” that some call America’s
first wealth tax. Others say it is merely a
long-overdue reform of the tax code.
The difference is important, as some
lawyers contend that the government
has the constitutional right to tax
income but not wealth.
Some 7,800 households with a net
worth of $100 million or more would pay
a minimum tax of 20 per cent on their
incomes, newly defined to include
unrealised gains in the value of their
liquid assets such as stocks and bonds.
Unrealised gains in the value of illiquid
assets such as art and property will also
be taxed, using a complex system for
valuing and taxing them. To borrow
from Tevye, the poor milkman in Fiddler
on the Roof, the problems posed would
“cross a rabbi’s eyes”.
Conceptually, there can be little
objection to taxing unrealised capital
gains, as the current system provides the
very wealthy with a sort of tax loophole:
they typically borrow against those gains
and use the cash as they would any other
income subject to income tax. Many pass
the appreciated assets on to heirs, who
do not have to pay tax on the gains.
Politically, a tax that would fall
primarily on billionaires has an
advantage for the president: it just might
satisfy the financial bloodlust of his
restive progressive wing, hot under the
collar about his new effort to expand the
production of fossil fuels.
Elon Musk, who says that his tax bill
this year will come to $11 billion, would
owe an additional $50 billion, and Jeff
Bezos an additional $35 billion, should
the Biden budget be adopted. Warren
Buffett, who has been clamouring for an
increase in his taxes so that his rate will
exceed his secretary’s, would be hit for
an extra $26 billion. The tax would
therefore have the effect of transferring
resources from the men who have given
us Tesla, Amazon and Berkshire
Hathaway to politicians to spend in ways
they deem useful, at no risk to their own
financial positions.
Traditional taxes would also rise if the
president prevails with Congress; several
Democrats are not eager to run for re-
election on this part of his plan. Thecorporate rate is to go from 21 per cent to
28 per cent, the top individual rate from
37 per cent to 39.6 per cent, and the tax
rate on capital gains would jump from
23.8 per cent to 43.4 per cent.
In the policy debate touched off by
the president’s tax proposal, which is a
long way from becoming law, the
ordinary difficulty of determining what
is “fair” is compounded by the times in
which we live. Inflation is rampant,
propelling some taxpayers into higher
tax brackets even though their real
incomes have fallen. They might
reasonably claim they are due a tax cut.
Covid “relief funds” have been
lavished on the not-needy; the Treasury
might reasonably claw back some cash,
along with money designated for Covid
relief that ended up financing a luxury
hotel in Florida ($140 million), golfIrwin Stelzer American Account
courses in Colorado ($6.6 million) and a
ski resort in Iowa ($2 million).
Most important is the unfortunate
coincidence of three events:
lXi Jinping’s China is challenging
America’s role in world affairs;
lVladimir Putin’s brutalising of Ukraine
will oblige America to provide massive
and ongoing amounts of US aid; and
lPresident Biden has submitted a
budget calling for real (inflation-
adjusted) reductions in military
spending.
America must decide whether to end
the progressive shrinkage of its military
power. It must decide whether its
national security demands that it catch
up with China in important aspects of
militarily crucial research and
development. It must decide how much
to spend on the long-term support of the
Ukrainian military and the country’s
civilian population. It must decide
whether the cost of refurbishing its
military requires a review of plans to
expand the entitlement state, or how to
pay for both guns and butter.
No small order for a fractured political
class about to begin a rancorous, off-year
congressional election on which Donald
Trump has $100 million to spend to
make it about him rather than the issues
facing the nation.
[email protected]Irwin Stelzer is a business adviserA tax primarily on
billionaires would
satisfy Biden’s
progressive wing
T
iming can be very cruel. In just
over three weeks, the Bank of
England will celebrate the silver
anniversary of its
independence — 25 years in
which it has been responsible
for setting interest rates and
other aspects of monetary
policy. I can remember vividly the press
conference at which then-chancellor
Gordon Brown made his bombshell
announcement.
Had this anniversary happened a year
ago, it would indeed have been a cause
for celebration. Inflation in May 2021 was
almost exactly on target, at 2.1 per cent,
while the Bank’s actions in the pandemic
helped steer the economy through a
period of disruption and uncertainty —
and last spring the economy was
growing robustly, without a care.
Things look rather different now. The
country is gripped by a cost-of-living
crisis and businesses are reeling under
the impact of sharply rising costs. The
Bank itself expects inflation to hit 8 per
cent very soon and warned last month
that it could be even higher by the end of
the year. It may nudge 10 per cent.
That makes it the worst kind of
anniversary — one of badly missed
targets and an inflation cat that is not
only out of the bag but cocking a snook
at the Old Lady of Threadneedle Street.
This, though uncomfortable for
everybody, may be no bad thing. It
means that questions can be asked,
rather than nodding through the current
framework as an unalloyed success.
One thing should be said at the outset:
there should be no return to the days
when chancellors set rates, often for
political reasons. While no central bank
could be expected to hit its target exactly
at all times, the 25-year inflation record
has been a good one. Even including the
current surge, inflation has averaged
exactly 2 per cent over that time.
Independence also broke the British
pattern of panicky rate hikes, usually in
response to a falling pound. Official rates
have been low — perhaps too low for
some — averaging just 2.6 per cent over
the past 25 years, compared with
10.4 per cent over the previous quarter
of a century. That was not all as a result
of independence, but it was a big factor.
Independence was not just about
monetary policy. The Bank lost its role in
supervising the banking and financial
system in 1997 — and almost lost its
governor, the late Sir Eddie George, in
protest over the manner in which this
was done. It got it back after the financial
crisis and the system has been robust,
through Brexit and the pandemic, since.
There is, though, an elephant in the
room — the fact that in this anniversary
year, inflation will peak at several times
the official 2 per cent target. Some think
the target should be changed — say, to
4 per cent —while others think there
should be a different target. That could
be, perhaps, for the price level rather
than the rate of change of prices, or for
money GDP (gross domestic product)—
the combination of growth and inflation.
None of these, it seems to me, would
offer a better policy guide. An inflation
target, set at 2 per cent — a rate that does
not distort economic decisions — is the
least bad choice.It should engage
more in debates
going on outside
its four walls
When the UK first adopted an
inflation target, in the aftermath of the
ERM (exchange rate mechanism)
debacle of September 1992, some
questioned its economic legitimacy.
Could you really target something that
was at the end of a process, rather than
at the beginning?
To do so, the Bank required accurate
inflation forecasting — something that
has deserted it recently. In November
2020, which is when it might have been
acting to head off inflation given the lags
in monetary policy, the Bank’s forecast
was that inflation in the second quarter
of 2022 — in other words, now — would
be below 2 per cent even if the base rate
stayed at 0.1 per cent. The Bank spent
much of the pandemic adding negative
interest rates to its “toolkit”.
Had it known what was going to
happen to inflation, perhaps it would
not have responded, deciding instead to
“look through” a period of high inflation
rather than raise interest rates during
the pandemic. This, indeed, is the get-The current members of the MPC are
all eminently qualified, and the selection
process for external members is
rigorous. But the mavericks of the early
days of the MPC — when members were
chosen by Brown and his economic
adviser Ed Balls, with advice from
officials — are no more. There is more
“groupthink” on the MPC than there
should be.
That — and the impression it
sometimes creates of being an ivory
tower institution with too little
awareness of what is happening in the
world and in financial markets (which
have been wrong-footed recently by the
Bank’s communications) — is not
healthy. The Bank should engage more
in the debates that are happening
outside its four walls, including whether
the massive QE programme it launched
in response to the pandemic
compromised its independence. I do not
think so, but others do.
These are problems that can be fixed
and, as noted, we should stick with
independence. It has mainly served us
well. It can continue to do so.PS
It has come to my attention, because
people keep telling me, that in these
grim times, cheer is needed. Yes, you
have guessed it, demands are growing
for me to bring back the jokes. I stopped
doing them when I was getting sent ones
that repeated word for word those that
had appeared here. With this proviso, if I
am going to start them up again, I shall
need new material. Don’t force me to
raid my book of Dad jokes.
In the meantime, let me draw on the
humour of a previous chancellor. Two
outstanding books by former
chancellors are The Time of my Life by
Denis Healey and The View from No.11 by
Nigel Lawson, though there are other
good efforts. Lawson had his moments,
but Healey’s wit was more cutting.
With Rishi Sunak said to be
exasperated by the official forecaster, the
Office for Budget Responsibility, these
words of Healey — chancellor from 1974
to 1979, when Britain had to turn to the
IMF for a bailout — may apply: “After
eight months in the Treasury, I decided
to do for forecasters what the Boston
strangler did for door-to-door salesmen
— make them distrusted for ever.”
He may not have succeeded but his
bon mots are legendary. He famously
described being attacked by Geoffrey
Howe, another former chancellor, as like
being “savaged by a dead sheep”. He
admitted he got it from Churchill, who
said an attack by Clement Attlee was like
being savaged by a dead lamb.
Healey denied saying he would
squeeze the rich “until the pips squeak”,
though he did say that about property
speculators. Margaret Thatcher was, for
him, “the great she-elephant — she who
must be obeyed, the Catherine the Great
of Finchley”.
Politicians sometimes object to being
mocked. Healey was a target for Mike
Yarwood, the TV impressionist, and took
a different view. Being sent up made him
more popular, he found, even adopting a
phrase Yarwood had made up, “Silly
Billy”, for his own use.
[email protected]out clause that can mean hitting the
inflation target is something of a fair-
weather friend. In extremes, when high
inflation is due to an external shock, the
Bank is allowed the leeway of not acting,
if to try to bring inflation back to target
would be at a prohibitive economic cost.
That is fair enough, but there is still
room to criticise its recent actions. From
about this time last year, when it was
clear that there was going to be a
significant post-pandemic inflation
problem, the Bank could and should
have halted its quantitative easing (QE)
programme, as many of us argued. It
carried on, easing monetary policy
while inflation was rising, until the end
of last year.
That was symptomatic of a wider
problem in the Bank and its monetary
policy committee (MPC) — one of inertia.
It continued with the QE programme
because it had announced it would do so
at the end of 2020. Operated flexibly, a
sensible policy would have been to halt it.
That lack of flexibility can also be seen
in interest rates. In the first half of its 25
years of independence, the MPC had a
“little and often” policy on rates,
changing them 45 times in 12½ years. In
the second phase of independence,
lasting until now, the official rate has
been changed just eight times, and that
includes hikes in each of its past three
meetings. It is almost as if the Bank came
to regard rates as a dangerous weapon —
one to be used infrequently, if at all. But
if monetary policy loses its flexibility, it
loses one of its big advantages.... AS HAVE INTEREST RATES
Source: Bank of England2006 2008 2010 2012 2014 2016 2018 2020 2022Bank rateSource: ONSINFLATION HAS MAINLY BEEN
LOW SINCE INDEPENDENCE ...CPI annual rate-206428%6%5 4 3 2 1 02000 2005 2010 2015 20202% targetDavid Smith Economic Outlook
President makes
the pips squeak
A very unhappy anniversary
for the Bank of England
an early victory by moving its activities
at Gatwick into a new subsidiary, BA
Euroflyer. That will go live shortly, with
staff on cheaper, more flexible contracts.
But the looming surge in labour costs
in a more competitive environment — BA
has already offered a one-off bonus to
20,000 pilots and crew to keep them
sweet — will bring questions about its
identity into sharp focus. Can it be a
truly premium brand on routes such as
London to New York while running a
budget service on routes such as London
to Lisbon? Or will a squeeze on margins
mean it will drift further towards being
neither? Doyle and Gallego need to come
up with answers urgently, and blaming
the Slasher will work for only so long.The case for consolidation in TV
Amid the sound and fury over Channel
4’s likely privatisation, there has been
surprisingly little mention of the seismic
changes reshaping the media landscape.
On Friday, the mega-merger between
Animal Planet broadcaster Discovery and
HBO owner WarnerMedia was finalised.
Shortly before, Amazon clinched its
takeover of film studio MGM. Before thatcame the fusions of Viacom and CBS, and
Disney and 21st Century Fox.
The Netflix era has ushered in an
unprecedented arms race for content
that will keep viewers’ eyeballs fixed to
streaming services and their wallets
open. In Europe, TV broadcasters have
reacted by consolidating, too. The
charge is being led by German giant RTL.
In France, RTL is trying to merge its
M6 channel with TF1, owned by
Bouygues. If they succeed after a lengthy
competition process, they plan to buy
out a minority partner in their shared
streaming service, Salto. In Holland, RTL
is merging with rival Talpa. In Germany,
RTL could even merge with ProSieben.
There is no doubt political spite in the
Tories’ plan to sell off Channel 4. But
there is also unavoidable logic in a
consolidation of the UK’s TV channels.
In 2009, our competition watchdog
shot down Project Kangaroo, a shared
BBC/ITV/Channel 4 internet hub. Time is
now running out for the streaming wars’
laggards. TV needs a revolution if it is to
survive the rise of not just Netflix but
TikTok, YouTube and the rest.
[email protected]Concerned about competition from the
likes of easyJet and Ryanair in Europe,
and envious of their racier stock market
multiples, it took the brand steeply
downmarket in short-haul.
Walsh was admired in the City for
holding the schizophrenic edifice
together while delivering the numbers,
and hated by the unions. In 2020, he and
Cruz sacked 10,000 staff and threatened
to impose a “fire and rehire” policy on a
further 30,000 (BA later backtracked on
the second part). Years of fractiousW
illie “Slasher” Walsh was
every bit as sensitive as his
nickname suggested. And
before he left International
Airlines Group (IAG) in a
blaze of controversy over
job losses almost two years
ago, Walsh warned that his
successor as chief executive, Iberia’s Luis
Gallego, would be just as tough: “If he
was sitting here, he’d be talking in a
Spanish accent, but I don’t think he’d be
saying anything different.”
When Gallego replaced Walsh’s cost-
cutting lieutenant Alex Cruz with the
more user-friendly Sean Doyle in the
cockpit of British Airways less than three
weeks after taking over, it seemed he
would in fact be plotting a different
route. “We need to be clear what our
customers’ expectations are and that
may require shifts in direction,” Doyle
told this newspaper the following
summer. “From booking until landing,
BA needs to feel like a premium
experience. We stand for excellence.
We’ll drive that through the airline.”
That promise has already veered off
the runway and burst into flames. InFebruary, BA had to cancel short-haul
flights from Heathrow, blaming a
“technical failure” in its computer
hardware. There have been baggage
reclaim problems, and in recent weeks
hundreds more cancelled flights due to
further IT issues and staff shortages. It is
Walsh’s prediction that the status quo
would continue, not Doyle’s vow to
change, that has so far held true.
EasyJet has also had to cancel
hundreds of flights. Customers react less
emotionally to being let down by the
budget carrier. BA flyers no longer
expect to sip Krug on Concorde, but they
do — not unreasonably — hold the flag
carrier to a basic level of service. Its
pledge to work “24/7”, while manning
phone lines from 8am to 8pm, and the
use of jargon such as “pre-planned
cancellations”, gets up their noses.
“There are lots of organisations who
push out crap and believe it, but BA has
got to be right up there,” says one reader.
For years, BA has stripped costs and
perks out of its short-haul operations
while making its money on long-haul
flights from Heathrow, where it has more
than half the take-off and landing slots.IAG500p300400200100Source: Thomson Reuters Eikon0
2020 2021labour relations have probably damaged
BA’s brand as an employer and made it
harder to attract workers now the
recovering industry is desperately in
need. Less loyalty means it may also
suffer more Covid sick days than rivals.
Chaos at Manchester airport, where
council workers have been seconded to
help recruit more people, underlines the
scale of the problem. “People have left
the industry and gone to drive for Tesco,
or goodness knows who else,” says
analyst Chris Tarry. “If you look online,
you’ll see loads of job ads that say
‘urgently needed’. Then you look at the
wage and it’s £10.81 an hour. I’m sure
you can get more in a comfortable
environment where you don’t get split
shifts and you’re not on a wet, cold ramp
at 5am. It’s a structural issue — and
wages are going to have to go up.”
The current IAG and BA guard are still
just about able to blame Walsh and Cruz
for their woes. That will soon change.
They need to invest in the brand, and
pressure on staff costs will make the task
of repositioning BA even harder.
BA has always been more expensive to
run than easyJet or Ryanair. Doyle wonOliver Shah
BA can’t blame Slasher Walsh forever —
it must decide what it wants to be