Thursday, January 24, 2013

Davos: Swiss president wilfully misunderstands his own country

Swiss President Ueli Maurer has made a speech at the World Economic Forum Annual Meeting in Davos, to a lot of very important people. Unfortunately, his grasp of basic political economics is woeful. Here's a taster.
"Switzerland is a federal state with twenty-six cantons."
OK, good. And a fine country it is too, in so many excellent ways. Now, though, Maurer says:
"Locational competition exists within our own borders. This leads to good infrastructure, to restraint in creating red tape and to low taxes. And individuals benefit just as much from all of this as businesses."
It sounds so reasonable, doesn't it?  The only snag is that this statement reflects economic illiteracy.

Swiss cantons, and the Swiss financial sector itself, get rich through stealing the wealth of other nations, though secrecy, tax loopholes and the like. That's the essence of their model. It's nothing to do with race-to-the-bottom competition within Switzerland. This line of thinking dates back to a fanciful 1956 paper by the economist Charles Tiebout, which rests on ridiculous assumptions (see more on that here.) Maurer continues:
"Diversity stimulates competition. That is not only the case in business, but also in politics."
Hogwash. This is the great fallacy, widely claimed by Maurer and many other proponents of tax competition: that market competition is good - so, hey, all forms of competition, including tax competition, must be good, right?

Dead wrong. As the FT's chief economics commentator Martin Wolf has noted,"the competitiveness of countries, on the model of the competitiveness of companies, is nonsense." These are two completely, utterly different beasts.

The confusion - which ultimately is a result of these two different things sharing the same word - stems from a deep confusion between two forms of competition: the healthy kind, and the unhealthy kind. Competition between companies in well-run markets is an example of the healthy kind: it helps stimulate innovation, improve productivity and efficiency, and lowers prices (and prevent companies from colluding to fix prices).

But competition between countries (or sub-national jurisdictions such as Swiss cantons) is another matter entirely. Countries can compete by, for example, offering laxer financial regulation or stronger secrecy -- a Swiss specialty for decades -- providing better shelter for tax evaders and other criminals. This is a race to the bottom, and it's hardly surprising that the European Union is so keen to crack down on this abuse. To illustrate this point, think about it this way: when a company cannot compete, it goes bankrupt and another (hopefully better) one, takes its place. For all the pain involved, this process of 'creative destruction' weeds out bad firms and keeps others on their toes and is a source of capitalism’s dynamism. But what does 'creative destruction' mean in the context of a country? A failed state?

Really. Maurer again:
"It is somewhat worrying when powerful states exert pressure on small but successful competitors. The result is that competition, the catalyst of progress, is stifled. Ultimately, everyone suffers a decline in prosperity."
No. When states co-operate to stamp out tax competition -- which has the end result of forcing down tax rates on the wealthy, and consequently forcing tax rises on everyone else. What you mean to say, Mr. Maurer, is that the world's wealthiest citizens suffer a decline in prosperity, as they are finally required to pay the taxes that their democratic electorates have demanded. Others pay more as a result.

It is not clear what Maurer learnt while serving as president of the Zürich Farmers' Association (1994-2008,) or as a key anti-immigration figure in the right-wing Swiss People's Party (SVP, with a record of saying things such as ("as long as I talk of negroes, the camera stays on me".)

Whatever it was he learned, it sure wasn't economics.

Or perhaps in Davos World, Maurer can only see wealthy people - so he thinks they qualify as 'everyone'.
 
We have a longer document, currently only in rough draft form, which we will publish in the coming weeks, which we will use to shred this kind of nonsense again and again.

Watch this space. (And if you can't wait that long, take a look at Treasure Islands, (p195 in the UK edition,) for a short, sharp dose of reality.)

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