Thursday, 19 October 2017

Why Facebook should be taxed and how to do it

The new information technologies have created a whole range of companies that have become extremely profitable. The most successful ones are in the list of the top ten most valuable companies in the world. Valuable here means the monetary value of all outstanding shares of these companies; their capitalization as economists call it.
Alphabet (better known as Google), Amazon, Microsoft, Facebook, Alibaba, are each worth $ 400 billion or more in the stock markets. They produce hardly anything tangible. They "make" information. These information companies are extremely successful. They also give rise to new problems.
The most salient characteristics of information companies is that the marginal cost of the information they produce is zero. To make a YouTube movie you have some fixed costs, such as a camera, a laptop and an Internet connection. But once the video has been made, you can broadcast it without increasing costs. Whether there are 10, 100 or 100,000 viewers of the movie does not change the costs of the movie producer anymore. The marginal cost (the cost of one additional unit viewed by someone) is zero.
That’s not all. The more viewers the moviemaker reaches, the more valuable his YouTube movie becomes. If he/she reaches an audience of, say, 1 million viewers, advertisers will be interested and will be willing to pay the creator of the video for placing ads. The more viewers there are, the more the advertiser is willing to pay. The YouTube producer thus produces something that has a marginal cost equal to zero and a marginal revenue that increases with the number of viewers. The more people reached with the movie, the richer the moviemaker gets without having to do something special.
Such a business model creates a number of problems. The first one is that information companies create a lot of economic value without the use of many production factors. You hardly need employees to generate a lot of income. Facebook with a capitalization of $ 400 billion employs 21,000 people. Walmart, which has a capitalization of 220 billion, has 2.1 million employees. Thus Facebook that is almost twice as large in terms of capitalization than Walmart counts only one percent of the number of employees of the latter. This means that a very high level of economic value is distributed to very few people. An inequality time bomb.
A second problem has to do with the fact that the people who join such an information platform (for example Facebook) actually give away information about themselves for free. This information becomes more valuable as more people join the platform. The big data on private information makes it possible to place highly targeted ads. The dream of all advertisers.
So companies like Facebook produce information that generates a lot of revenue using as ”raw material” the private information that they acquire for free from their users. They are great money machines generating huge wealth that hardly has to be shared and can be kept by the happy few in these companies.
Such a situation is untenable. More and more economic value is distributed to less and less people. What can be done about this? Here is my proposal. Facebook realized $ 26 billion in advertising revenue in 2016. This revenue was actually made possible thanks to the free "raw material" of the information provided by Facebook users. The government could apply a tax of 50%, for example, assuming that at least half of that income is due to the free information. That means 13 billion dollars. There are now about 1.23 billion Facebook users. So that means (rounded) $ 10 per user and per year. That seems to me to be a good estimate of the yearly value of the information provided by the individual user to Facebook.
So my proposal becomes: a 10-dollar tax per user to be paid by Facebook. Zuckerberg will be a little less rich after this tax, but will still have a lot of money left.
There are many issues with such a proposal. It should preferably (but not necessarily) be coordinated internationally. Not an easy thing. There is also the issue of what the government should do with the revenue. One possibility would be to return 10 dollars to the Facebook users every year. Alternatively, the government could use the revenue to invest in education, the environment or sustainable energy.

I think these are separate issues that can be resolved and that do not stand in the way to tax Facebook and other information companies (e.g. Google, Amazon) that use private information freely and transform this into a fabulous money machine that benefits only a few. 

Wednesday, 4 October 2017

Catalonia and Brexit: the same nationalism

The British Prime Minister, David Cameron, will not enter the history books as an enlightened leader. However, when in 2014 he had to decide to allow the Scottish referendum, he used his brain and opened the door for the referendum. It took place on September 18, 2014. Only 45% of the Scotts voted for independence.
The contrast with the referendum in Catalonia could not be greater. The Spanish Prime Minister Rajoy stupidly decided to use violence to prevent a referendum in Catalonia, despite the fact that a peaceful referendum would most probably have led to a similar outcome as in Scotland. Spain and Catalonia are now on collision course; a situation that could have been avoided if the Spanish Prime Minister had not suffered from dogmatism and a degree of nationalism equaling in intensity the Catalan version.
The Catalan nationalists now have been given a fantastic boost thanks to Rajoy's stupidity. The TV images of Spanish robotic police officers hitting old and young to prevent them from voting create a perception of an oppressed people fighting for their freedom.
Nothing could be further from reality. The Catalans are not an oppressed people. They have a high degree of autonomy. They can organize their own education in their own language. No obstacles exist for the cultural development of Catalonia. It is the most prosperous region of Spain. Barcelona is a bustling city like no other in Spain. The Catalans are heard at the regional, national and European level. The image of an oppressed people is ludicrous.
Catalan nationalism is of the same kind as British nationalism that led to Brexit. It is based on a number of myths.
The first myth is that there is an external enemy. For the Brexiteers these are the European authorities (the European Commission, the European Court, etc.), which impose their arbitrary will on Britain. For the Catalan nationalists the enemy is the Spanish government oppressing the Catalan people.
The second myth is that the people who fight for their independence have a clearly defined identity. The task of national politicians is to listen to the will of the people. There can be only one voice. There is no room for different and opposing voices. The British government is now calling for patriotism. The opponents of Brexit are not true patriots.
The third myth is that independence will generate unsuspected economic prosperity. When the people “take back control” they will have the tools to achieve maximum economic prosperity. That is today the argument of Brexiteers like Boris Johnson. When Brexit will be realized (preferably as soon as possible), Britain will have achieved its true destiny. "Global Britain" will take over from the protectionist EU. Great Britain will merrily conclude free trade agreements with the rest of the world, which will lead to unprecedented prosperity. A similar argument of more prosperity for an independent Catalonia is heard from Catalan nationalists today.
The reality is that globalization undermines national sovereignty. This happens in many ways. One example. Large multinationals blackmail national governments in Europe, with the result that corporate taxes decline almost everywhere. In no country, however, is there a will of the people in favour of reducing these taxes. Yet this is the outcome because governments act as national entities. Were they to decide jointly on corporate taxes in Europe, multinationals would be unable to blackmail these governments and there would be no creeping decline in corporate taxes.
Another example. International trade today is not influenced so much by tariffs but by non-tariff barriers. Large countries decide about standards and the regulatory environment that will govern trade. There are now essentially three countries, the US, the EU and China that can aspire to decide about the nature of these standards and rules. The other countries play no role in this game. Thus when Great Britain exits from the EU so as to gain more sovereignty (“to take back control”), this gain is only formal. In fact its real sovereignty declines. Obviously the same holds for Catalonia.
We arrive at the following paradox in a globalized world: when nationalists pursue more formal sovereignty they achieve less real sovereignty of the people. They want to take back control and they end up with less control. That’s what Great Britain will end up with. That’s also what the Catalan nationalists will achieve if they pursue their nationalistic dreams.
This paradox has a corollary: when countries in Europe renounce formal sovereignty this leads to more real sovereignty of the peoples of Europe. 

Tuesday, 28 March 2017

Brexit creates window of opportunities for the EU

The British government has officially started the "divorce" procedure from the European Union. This procedure must be completed within two years. In April 2019 the UK will cease to be a member of the EU.
Most divorces are painful affairs mainly because an agreement has to be found on who pays whom. The same will be true for the divorce of Great Britain and the European Union. The European Union intends to present a stiff bill to the British Government. According to some estimates this could go up to 60 billion euros. The hard line in the Conservative government of Theresa May does not want to pay a cent. These are the people who during the referendum campaign promised that Brexit would create massive budgetary means to be used to save the National Health Service from bankruptcy.
Between 0 and 60 billion there are many numbers waiting for a possible compromise. But the latter will be very difficult because the hard camp in the British government considers each number above 0 as an act of treason to the British people.
The Brexit Ministers continue to repeat that a new trade agreement between the UK and the EU is easy stuff and can be completed in two years, at least if the Europeans are "reasonable". If they are, they will see that it is in their own interest to meet British demands. If they don’t it will be proof of their vindictiveness.
The British demands are derived from the very successful referendum slogan: "to take back control of our borders, our laws and our money." This means full control over immigration; the end of the jurisdiction of the European Court of Justice on British soil; and not a penny more for Europe. The prime minister has made it clear that the first two demands cannot be negotiated away. About the third one a compromise is possible but no one knows how much negotiating space the British prime minister has.
These UK demands imply that the UK excludes itself from the internal market. The UK government, as the representative of a fully sovereign nation, will therefore have to negotiate a new trade agreement. And like any trade agreement this will drag on for years. As a result, one can say with great certainty that in April 2019 there will be no trade agreement between the UK and the EU.
What is striking in this drama is that under the spell of nationalism the British government has based its policies on a big illusion. It is the illusion that, as in the past when Britain ruled the waves, it can be fully sovereign and freely trade with the rest of the world without having to accept rules that are decided elsewhere. This was possible when Britain was the master of the world and decided about the rules that the other nations would have to accept to trade. Today, however, Britain is a small country. Its GDP is only 15% of the EU’s GDP. If this small country wants to trade with the European Union it will have to accept the rules that are decided on the European continent, not in Britain. If it wants to trade with the rest of the world, it will also have to accept rules drawn up elsewhere. It will be a painful awakening for the British who have been misled by their government into believing that they can have free trade and full sovereignty.
For the EU Brexit creates a window of opportunities. When the British joined the European Community in 1974 their intention was not to make Europe stronger. On the contrary, the British strategy was to weaken the European integration effort from inside. Since their accession the British governments have opposed attempts to apply majority rule in the union, and instead have tried to force an inter-governmental approach where each country maintains a veto power. The British entered the European house not to strengthen it, but to halt its further construction and even to deconstruct it.
The fact that Britain now leaves the house creates new possibilities to take steps towards further integration. In the tax field, for example. This is an area where,  at the insistence of Britain (but not only Britain), veto power of national governments has been maintained. As a result, multinational companies have exploited the lack of coordination in setting corporate income taxes to blackmail individual governments. This has led to a race to the bottom where major multinationals pay almost no taxes, although they profit from public goods provided by European governments. This problem can only be solved by jointly deciding about corporate income taxes. This will not be easy, as there are other countries that benefit from not having a common approach to taxation (Ireland, Luxembourg). But at least the major obstacle to a common policy will have been removed.
Thus the decision by the UK government to leave the European house should be welcomed by EU-member states instead of being deplored. It creates a window of opportunities for further integration on the European continent. This window of opportunities, however, can only be exploited if the EU makes her negotiating position clear. This should be one in which the EU recognizes that the UK wants to be fully sovereign. The EU therefore should make it clear that this makes UK access to the internal market impossible. This is not a choice of the EU but the logical consequence of the UK’s quest for full sovereignty.
Business lobbies both in the UK and the EU will push for a different outcome. One in which the UK will be allowed to enjoy exceptions to the rules governing the internal market while maintaining access to it. The EU should resist these lobbying efforts. Failing to do so will open the door for other nations to do similar “cherry-picking”. This would undermine the integrity of the union and would contribute to its disintegration. 

Monday, 31 October 2016

How far should we push globalisation?

The discussions about CETA, the trade agreement between Canada and the European Union, have focused almost exclusively on two questions. They are important but certainly not the most fundamental ones.  In this article I first discuss these two questions and then turn to the more fundamental question of how far we should push globalization.
The first question at the center of the debate around CETA concerns the way national regulations on environment, safety and health are made consistent with each other. To make trade possible in a world where trading partners have different rules about the environment, health and safety, a procedure must be followed to make these rules mutually acceptable. When, for example, two countries wish to trade in poultry, they must agree on what constitutes a healthy chicken. The attitude of many opponents of CETA in Europe is that European regulation is superior to the Canadian (or American in the context of TTIP), and that as a result Canadian and American chicken are suspect, if not poisonous. The implicit hypothesis of this attitude is that European governments care more about the health and safety of their citizens than the Canadian and American governments do about their citizens.
Such an attitude makes trade agreements very difficult. Moreover, it is not based on facts. There is no reason to assume that European legislation of health, safety and the environment is superior to the North American one. If that were the case, the European regulators would long ago have curbed the harmful emissions of rigged European-made diesel cars. They did not, the US authorities did.
The second question at the forefront of the CETA negotiations had to do with the legal procedures to resolve disputes between foreign investors and national authorities. The CETA trade agreement, like many others, provides that foreign investors who feel harmed by new environmental, health, and safety regulations can turn to a special arbitration procedure. This is indeed a problem. It would be better to accept the jurisdiction of national courts in these matters, rather than allowing international investors to turn to special arbitration courts. The feeling in many countries that this is an unacceptable discrimination favoring mostly multinational corporations should be respected. It is better to rely on the national courts to settle disputes. Yet I have the impression that the opponents of CETA (and TTIP) have blown this problem out of proportion, even arguing that the ratification of these trade agreements would undermine the foundations of our democracy.
A more fundamental issue that arises here and which has not sufficiently been addressed in the discussions around CETA has to do with the question of  how far we should push globalization?
In my academic career I have always been an advocate of free trade. Free trade provided the basis of the phenomenal material prosperity we have achieved in Europe in the postwar period. It has also made it possible for hundreds of millions of people, especially in Asia, to be pulled out of extreme poverty and to live a decent life.
But it now appears that globalization reaches its limits. These limits exist for two reasons. Firstly, there is the environmental limit. Globalization leads to very strong forms of specialization. There is of course nothing wrong with specialization as it provides the condition to create more material welfare. But specialization also means that goods are transported around the globe a lot. The lengthening of the value chains that has been made possible by the reductions of trade tariffs means that the same goods can travel back and forth between many countries before they achieve the final consumers. All this transporting around creates large environmental costs (e.g. CO2 emissions) that are not internalized in the price of the final product. As a result, the prices of these products are too low and too much is produced and consumed of them. Put differently, globalization has made markets freer but these  markets do not function properly, giving incentives to produce goods that harm the environment.
When the proponents of CETA (and TTIP) argue that trade agreements will lead to higher GDPs they are right, but they forget to say that this will be accompanied by rising environmental costs. If we subtract the latter from the former it is not certain that this leaves something positive.
The second limit of globalization has to do with the highly unequal distribution of benefits and costs of globalization. Free trade creates winners and losers. As argued earlier there are many winners of globalization in the world. The most important winners are the hundreds of millions who used to live in extreme poverty. There are also many winners in the industrial countries, e.g. those that work for or are shareholders in exporting companies. But there are also many losers. The losers are the millions of workers, mostly in the industrialized countries, who lost their jobs or have seen their wages decline. These are also the people that have to be convinced that free trade will ultimately be good for them and their children. Not an easy task. If, however, we fail to convince them the social consensus that existed in the industrial world in favour of free trade and globalization will deteriorate further.
The most effective way to convince the losers in the industrial world that globalization is good for them is by reinforcing redistributive policies, i.e. policies that transfer income and wealth from the winners to the losers. This, however, is more easily said than done. The winners have many ways to influence the political process aiming at preventing this from happening. In fact since the start of the 1980s when globalization became intense most industrial countries have weakened redistributive policies. They have done this in two ways. First, they have lowered the top tax rates used in personal income tax systems. Second, they have weakened the social security systems by lowering unemployment payments, reducing job security and lowering minimum wages. All this was done in the name of structural reforms and was heavily promoted by the European authorities.
Thus, while globalization went full speed, industrial countries reduced the redistributive and protective mechanisms that were set up in the past to help those that were hit by negative market forces. It is no surprise that these reactionary policies created many enemies of globalization, that now turn against the policy elites that set these policies in motion.
I come back to the question I formulated earlier: How far should we push globalisation  My answer is that as long as we do not keep in check the environmental costs generated by free trade agreements and as long as we do not compensate the losers of globalisation  or worse continue to punish them for being losers, a moratorium on new free trade agreements should be announced. This is not an argument to a return to protectionism. It is an argument to stop the process of further trade liberalization until the moment we come to grips with the environmental costs and with the redistributive effects of free trade. This implies introducing more effective controls on CO2 emissions, raising the income tax rates of the top income levels and strengthening social security systems in the industrialized countries.

Thursday, 21 July 2016

How to prevent Brexit from damaging the EU

The UK has a new government under the leadership of Theresa May. The mandate of the new government, as the new prime minister stated, is to "make a success of Brexit". Although the detail of what success here means is unclear, there can be no doubt about what it means in general. It should be interpreted as keeping access to the EU single market while gaining concessions from the EU about the rights of the United Kingdom to control immigration. In other words: trying to square the circle. Something the Brexit campaigners have led millions of British citizens to believe can be done easily.
What negotiation strategy should the European Union take? Here is the choice that must be presented to the UK. Either the UK government takes over the Norwegian model or it stands alone and negotiates new trade agreements with the EU and about fifty other countries (or group of countries) in the framework of the rules of the World Trade Organization (WTO). The EU must make it clear that there is nothing between these two choices. There can be no "special deal" with the United Kingdom.
If the UK accepts the Norwegian model, it retains full access to the single market. In that case there are no obstacles for British goods and services in the EU and for EU goods and services in the UK. But the price the UK pays in this model is the free movement of EU citizens in and out of the UK. Without the free movement of people there can be no free movement of services. This is the core of the single market. Moreover, the Brits will have to accept two other things in the Norwegian model.  First, they will have to abide by the rules on standards, health and safety that are decided in Brussels without being involved in the decision making process. Secondly, they will have to contribute to the European budget.
It is very unlikely that the UK government will accept this model. The Brexit camp considers free migration and Brussels legislation as diabolic and will revolt if the UK government accepts these conditions. True there is an important faction in the new government that is attached to maintaining full access to the single market and sees few problems in accepting free movement of people and Brussels regulation. But this faction is probably too weak to counter the demands of  Brexit supporters.
I assume, therefore, that the British government will reject the Norwegian model and will try to obtain concessions from the EU that reduce migration flows, while ensuring access to the single market. Here, the EU must make it clear that a special deal with the UK is excluded. The EU must insist that the only other option for the UK is to stand on its own feet, and to start negotiating new trade deals with the EU and other countries after Brexit is completed. In other words, the UK must be treated like the US, China, Brazil, etc., i.e. as sovereign nations that insist on maintaining full sovereignty over their trade agreements. The trade negotiations between the UK and the rest will take years, if not decades. Their outcome is uncertain. It is not clear, for example whether the UK will be able to maintain free movement of services with the EU as this freedom is intimately linked to the free movement of people. But that is a problem for the Brits who have chosen to embrace full sovereignty.
Here are the reasons why the EU should not accept to be dragged down in negotiating a special deal with the UK. Some EU-countries are tempted today to also organize referenda. I have no problem in principle against such referenda. If citizens of a country dislike being member of a club, they should be able to leave. This will be better for all. There is no point in living together with people who intensely dislike each other. However, it is in the interest of both parties that the terms of the divorce should be made clear in advance.
That is why the EU should make it clear what potential exiters should expect. It will be either the Norwegian model or a “standalone-model” in which the newly sovereign nations will face the difficult task of establishing new trade agreements on their own. Clarity is essential for those who consider leaving the EU. This clarity can only be achieved by excluding a privileged trade agreement with the United Kingdom.

When the UK joined the EU in 1973 its main strategy was to prevent the union from becoming too strong. The UK political elite decided that this could best be achieved from inside the union. Now that the UK is departing the century old British strategy remains the same, i.e. to weaken the forces that can make Europe stronger. The UK can achieve this by insisting on a special deal between the UK and the EU whereby the UK maintains the benefits of the union while not sharing in the costs. Such a deal, if it comes about, will signal to other member countries that by exiting they can continue to enjoy the benefits of the union without the costs. Such a prospect would fatally weaken the European Union.