The sugar tax looks more like a way to raise money than cut obesity

Last week, the Government published a draft of the legislation intended to implement the Soft Drinks Industry Levy or sugar tax. This was supposed to be the most contentious aspect of this year’s UK Budget. Perhaps the Chancellor of the Exchequer at the time, George Osborne, was hoping it would provide cover for some the other measures that blew up in his face, like forcing all schools to become academies or cutting disability benefits. Osborne is gone now, but the sugar tax lives on.

The tax is supposed to add about 8p to the cost of a can of Coca Cola from April 2018. Many people have been justifiably concerned it will fall disproportionately on the poor. Research on the effectiveness of sugar taxes is mixed but there is some evidence that they might be effective in reducing sugar consumption. The Government is certainly justified to give it a go. Even if we find it doesn’t work, that’s useful to know, as long as politicians are willing to admit to their failure.

From the point of view of designing effective new taxes, the soft drinks industry levy seems sensible. For example, the Government doesn’t want ordinary people to have to pay the tax themselves. Think about the way the income tax and national insurance on our salary are paid via PAYE before we ever get our hands on it. That lessens the pain we feel about losing a large chunk of our wages to HM Treasury each month. The sugar tax works on the same principle. It’s paid by drinks manufacturers rather than by consumers. Of course, the cost will be passed on to the people buying the drinks, but then all taxes are ultimately paid by human beings. The sugar tax will also be a stealth tax. We won’t see it on our shopping receipts or know exactly how much we are paying.

The art of designing a tax is to ensure that it brings as much money as possible with the minimum of political blowback. In other words, it “consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Nonetheless, the sensible implementation of the sugar tax might be an obstacle if it is supposed to reduce obesity rather than raise revenue. If people are not aware they are paying the tax, they are unlikely to alter their behaviour as a result of it. It might work better if the amount payable was emblazoned on soft drinks’ packaging for all to see.

How can we tell if the sugar tax is working? It is currently expected to raise a bit over £500 million in its first year of operation. If that number goes down, it means sugar consumption is going down too. Ideally, the revenue from the tax would drop to nil as we stop consuming sugary drinks at all. However, as it happens, the Government is only predicting a slight decrease in the revenue raised each year, suggesting that it does not expect the sugar tax to have much effect on our drinking habits.

For the moment, the Government is relying on the manufacturers to cut the sugar in their products. However, if the sugar tax doesn’t cut our intake, the Government might be tempted to increase the rate until it has an effect. It wouldn’t be long until the soft drinks levy brings in £1 billion plus a year and becomes just another revenue raising sin tax like cigarette and alcohol duties. If that happens, the naysayers claiming it is just way to extract cash from the feckless poor would be proved right.

The victorious Uber claimants may regret it if HMRC become involved

The Uber app has become an essential part of life for many people, although I admit I’ve never used it. Out here in darkest Kent, there are no buses and getting a minicab to anywhere is horrendously expensive. That means a car is essential for almost everyone.

To recap, the Employment Tribunal last week found that two Uber drivers were ‘workers’ and so entitled to the national living wage and holiday pay. However, the Tribunal did not decide that the drivers were employed by Uber, largely because the claimants did not ask to be treated like this. Why not? Because, being employed means that you are subject to much higher taxes compared to if you are self-employed or a ‘worker’. Unfortunately for the drivers, HMRC might now get interested. So it may start demanding that Uber drivers are subject to higher taxes and the claimants may find they have cut off Uber’s nose to spite their own faces.

If you are employed, the tax on your salary is about 17% higher than it would be if you were self-employed. Most of the difference is made up of employers’ national insurance contributions of 13.8% of your gross salary. These are in addition to employees’ national insurance that, at 12%, is also 3% higher for employees than for the self-employed (inevitably, there are allowances and thresholds to complicate these bald figures).

What, you might ask, is the difference between employees’ and employers’ national insurance? In truth, it’s not very much. They are both taxes on our wages, together with income tax. All this tax, and our take-home pay, has to come out of the same bucket of money that our employers set aside to make sure we turn up to work each day. Tax experts will point to historical reasons for the split between employers’ and employees’ national insurance. They might also note that, in theory, businesses rather than employees pay the employers’ contribution. But since businesses treat this as just another cost of having staff, it is really a tax on employees, just like income tax.

The reasons for the disparity between the taxation of the employed and self-employed are manifold. Some of it is explained by the fact that employees have more rights than the self-employed, including holiday pay and protection from unfair dismissal. For that reason, some on the left see the entire gig economy as a giant tax dodge where individuals are duped into self-employment by unscrupulous businesses. Another issue is legislative inertia. It is very hard to iron out niggles in the tax system without someone complaining. But I think the main point of employers’ national insurance contributions is that they are a very effective stealth tax. They enable the Government to extract the equivalent of an additional 14% of income tax without us really noticing. The reason that the self-employed don’t have to pay this is that they write cheques to HMRC themselves and would definitely spot a 14% hike.

The fact that Uber does not have to pay employers’ national insurance means that its drivers get more cash or other benefits such as flexible working. Presumably most Uber drivers like this arrangement or they’d just up sticks, and go to work for a regular minicab firm. If HMRC do force Uber to pay extra tax, that’ll just mean less money for the drivers; higher prices for customers; and probably fewer Uber cabs at 2am on a Sunday morning.

With the British gone, can the EU push on towards tax integration?

What do you mean, you’ve never heard of the common consolidated corporate tax base? It’s all the rage in Brussels, and represents a typical example of how Eurocrats are still increasing centralisation of the EU. Public concern about multinational companies avoiding tax has provided the cover to resurrect a plan for a Europe-wide corporate tax system. It was originally booted into the long grass in 2011, but Eurocrats are a patient lot and have been waiting for an opportunity to bring it back.

At the moment, companies operating in Britain calculate their taxes according to legislation introduced by the British Parliament. Likewise, German companies have to follow the rules from the Bundestag, and Irish companies the laws passed by the Dáil. Under the Eurocrats’ plan, all multinationals operating in the EU will have to calculate their taxable profits according to rules set centrally by the European Commission. The profits would then be divided up between the countries in which the multinational operates and subject to those countries’ corporate tax rates. Corporate groups would also be allowed to set off their losses in one European country against their profits in another country, depriving the country with the profitable business of tax revenues.

EU member states would be allowed to continue setting their own corporate tax rates. But in practice, the ability to do this also requires control over the tax base, which Brussels would determine. In any case, tax rates would be the next item on the agenda for centralisation. As far as Eurocrats are concerned, tax competition between member states is an unacceptable distortion of the single market.

The British Government has consistently stated that it would block the plans and does have a veto over corporate tax measures. However, Brexit has put paid to this obstacle. Eurocrats have also split their proposals into two parts. They will first try to get agreement on an common corporate tax base (CCTB) harmonising the rules under which multinationals operating in the EU have to calculate their taxable profits. Only then, when the same corporate tax rules have been imposed by Brussels on all member states, will the common consolidated corporate tax base (CCCTB) be launched. This will effectively treat the EU as a single country for company tax purposes.

Eurocrats are hopeful that by dressing the plans up as a way to combat tax avoidance by multinationals, they can exert political pressure on unwilling EU member states to swallow the pill. It is true that the measures would help prevent multinationals from using differences in the tax systems of various countries to reduce their tax bills. However, those differences are the product of decisions by sovereign Parliaments trying to ensure their tax systems are competitive and well-adapted to local circumstances. Even with the British out of the picture, expect strong resistance from smaller countries like Ireland and the Baltic States, which have used tax policy as a central plank of their economic offering to foreign investors.

In the interim, the European Commission is pushing forward with a directive specifically on corporate tax avoidance, which obliges member states to bring in a raft of measures that would previously have been the preserve of national Parliaments. Again, public concern about the activities of multinationals has provided the excuse for this power-grab. In this case, even the UK is on board, in large part because we are introducing most of the rules ourselves in any case.

Under the EU treaties, direct tax has been a matter for national Parliaments. However, if they can achieve unanimity in the Council of Ministers, Eurocrats can still extend their competence into this area. In that case, they don’t need treaty change with the attendant risks of triggering referendums. And once Brussels has the powers it wants, the ratchet has turned and member states can never get them back. The European Court is then be able to further erode national sovereignty through its programme of judicial activism. Already, it has decided old UK rules on taxing dividends and foreign subsidiaries are incompatible with the single market. This has left the British taxpayer with a bill for billions of pounds in compensation payable to the businesses that had suffered the taxes in question. Brexit is unlikely to mean these refunds can be cancelled.

Like many of the machinations in Brussels, the common consolidated corporate tax base is probably too obtuse to be easily understood by European voters. But it shows that the European Commission’s hunger for centralisation is as sharp as ever, especially now that the UK has left the building.

In praise of the Remain campaign: Europhiles should accept they gave it their best shot

Originally published at Brexit Central.

In the aftermath of the referendum, two myths have quickly taken root: that David Cameron made a reckless gamble when he called a vote on the EU and that Britain Stronger in Europe was a disunited rabble that fought a dreadful campaign.

These myths are dangerous because they fuel the calls for a second referendum. Europhiles tell themselves that if the vote was a gamble, another throw of the dice might produce a different result. And they imagine that a more focused and positive campaign for Remain could win the day.

Let me address these two myths in turn.

In his Bloomberg speech of January 2013, Mr Cameron promised a renegotiation with Brussels followed by an In/Out referendum. Commentators rushed to tell us that the speech was a reaction to the rise of UKIP and a way to plaster over the cracks in Tory unity. This confused the symptoms of Euroscepticism with the cause.

UKIP’s success reflected widespread anxiety in the country about the EU, while Conservative divisions had been opened by the refusal of successive British Governments to seek consent for the transfers of sovereignty to the EU by the treaties of Maastricht, Nice and Lisbon. Mr Cameron himself had reneged on his ‘cast iron guarantee’ of a referendum on Lisbon.

It’s also been suggested that he intended to drop the referendum pledge in any coalition negotiations with the Liberal Democrats after the 2015 general election. However, an analysis of Mr Cameron’s statements in the run up to the election shows that this is not true. The referendum was a red line for any coalition agreement. In any case, if he’d tried to ditch it, half the Conservative Party would have spontaneously combusted, including myself.

Far from being a short-term fix for his European troubles, Mr Cameron was thinking strategically. He realised that there had to be a reckoning to settle the question of Britain’s EU membership. And it would be far better for Europhiles if this reckoning took place at a time of his choosing and on his terms. The alternative was a referendum down the line under a Brexiteer Conservative leader using all the advantages of Government to ensure a vote for Leave.

Although the Cameron plan was a sound one for Europhiles, events got in the way. The Prime Minister assumed the EU would need a treaty to solve the Euro-crisis rather than kick the can down the road and condemn tens of millions to unemployment. He hoped Britain’s veto would strengthen his negotiating position. He also underestimated the pig-headedness of his fellow heads of Government in February 2016 when they scuppered his efforts to get a deal he could sell to the British people.

But I would argue that the failure of the renegotiation was a mistake by the EU rather than Mr Cameron, whose only error was to misjudge the EU’s capacity for self-harm.

The second myth concerns the referendum campaign itself. Brussels had dealt Europhiles a very weak hand, but I believe they played it as effectively as they could. For all the criticism of Project Fear, Remain had no choice but to ramp up the scare tactics. Europhiles like former Education Secretary Nicky Morgan might wistfully write that they should have fought a more positive campaign.

But, honestly, what was the optimistic message about the EU supposed to be? Lauding the alleged benefits of immigration was never going to work and Remain knew it was essential to keep the European Commission’s ambitions for more integration under wraps. When the EU took credit for peace in Europe or increasing prosperity, the British just chuckled at its lack of self-awareness.

So Project Fear was Remain’s only viable strategy, and if it was to work, it had to be full-on. One advantage for Remain was that it didn’t need to make any predictions about what would happen if it won. Unlike a political party promising the earth at an election, Remain’s warnings would only be tested if they lost, so they could really push the boat out on the doom-mongering. Of course, Leave won and all those predictions are coming home to roost for the likes of the OECD and HM Treasury. However, I doubt either Mr Cameron or even George Osborne are very bothered about that.

That is not to say Matthew Elliott’s fantastic Vote Leave didn’t matter. The point of a political campaign is not really to win the argument. Rather, it must identify its supporters and motivate them to get to the polling station on the big day. Vote Leave did that brilliantly.

The important point is that the referendum was not won because of narrow tactical concerns, mistakes made by Mr Cameron or Britain Stronger in Europe, or even because Leave voters were just protesting and didn’t mean to win. All these erroneous excuses have been made by Europhiles since 23rd June.

Leave triumphed because it is the settled will of the British people that they do not wish their country to be part of the European Union. Given that fact, Remain did as well as they could have done by pushing us so close. David Cameron deserves credit from Europhiles for giving Remain the best possible chance.

Why no one believed economists over Brexit

One of the reasons that Leave won the referendum on the EU was that no one believed the dire warnings promulgated by economists. We were told by HM Treasury, the IMF and just about everyone else who’d ever wielded a slide rule that Brexit would be a disaster. But when it comes to economic forecasting, we are right to be cynical. It wasn’t just the Queen who asked of the financial crisis, why did no one see it coming?

Human beings are quite good at microeconomics. That’s the economics asking how individual people and businesses behave. It studies why coffee shops price their beverages in the way they do. It considers the best way to get people to pay money into a trust box. It makes useful predictions about the various methods to incentivise employees. Microeconomics isn’t perfect; but it is getting better as telling us about how the world really works. You can find out a lot more in Tim Harford’s superlative book The Undercover Economist.

Conversely, human beings are quite bad at macroeconomics. That’s the economics asking how economies as a whole react to government policies and other long-term factors. It studies why unemployment goes up and down in the way it does. It considers the best ways to increase economic growth. But it fails to make any useful predictions about when there will next be a recession. Macroeconomics isn’t a complete basket case in that it has one or two successes to its name, such as the efficient markets hypothesis. Although some economists even manage to argue about that.

I’m not an economist. But as a historian of science, I have studied the history of a subject -science – that, once upon a time, was like macroeconomics is today. For centuries, scientists couldn’t make serviceable predictions or tell true theories from false ones. There were two very good reasons for this. The first was a lack of experimental data that could be used to test the theories. Experiments are difficult and easily misinterpreted. They need to give clear-cut results and to be repeatable. In any case, few saw the point of doing an experiment to prove something their theory already told them had to be correct. Early scientists lauded observation and could gather plenty of data. But their inability to test it was fatal.

The second reason early scientists failed was that no one was very interested in which theories worked in the real world. They were primarily concerned with how science could justify political and ethical conclusions. Scientific theories simply provided a way to understand nature that supported a particular moral or religious viewpoint. For example, the ancient Greek Epicurus said everything was made up of mindless atoms, which dovetailed nicely with his ethics. Christians rejected atomism because it invalidated transubstantiation.

Modern science now has enough experimental data to choose between theories and make accurate predictions. Microeconomics is like that too. Of course, it is by no means perfect. Microeconomists draw lots of false positives, make various mistakes and torture their data. But, at heart, they all agree what they are about and how the method is supposed to work. Microeconomists and scientists are successful for quite similar reasons.

Not so for macroeconomists. As a profession, they failed the call the financial crisis and, if they turn out to be right about Brexit, it will be down to luck. Admittedly, a few economists did predict the great recession, but probably fewer than you’d expect if all economic predictions were made randomly.

Macroeconomists are also divided into schools and they argue about policy according to the lights of the school to which they belong. Remember what I said about early scientists using their theories about nature to back up their political or religious agendas? Macroeconomists appear to be engaged in the same thing. Here is Andrew Lilico of Europe Economics defending the Conservative Party policy of austerity against a Keynesian. Meanwhile, this lengthy screed by Oxford’s Simon Wren-Lewis is a political polemic on behalf of the Labour Party dressed up as Keynesian analysis. I expect Ha-Joon Chang at Cambridge would call down a plague on both chez Lilico and Wren-Lewis. The mere fact that macroeconomists can’t agree on the most basic issues is damning evidence of how much trouble their discipline is in. Whatever is happening in the world, the Keynesian, the Marxist, the Austrian, the non-orthodox and the neo-Keynesian economist think can explain it in the light of their own theories.

The near-perfect correlation between the views of members of different economic schools and their political inclinations suggests very strongly that the data does not determine to which school they belong. Academic economists are often Keynesians who believe in government intervention while private sector economists are more likely to be laissez faire. This contrasts with, say, engineering where the laws of physics are understood in a very similar way at universities and aerospace manufacturers. Neither can economists say what will happen next. When they do get something right, it is simply luck. None of their theories work at the most basic level of being able to make practical and testable predictions.

This diversity of views is not entirely the fault of the macroeconomists. They can’t do many experiments because the systems that they study are too big. A central bank won’t cut interest rates for half the economy and leave them the same for the other half just to compare the effect of different policies. That means macroeconomists have to rely on observation rather than controlled experiments to build their theories. That was exactly the methodology employed by Aristotle to construct his scientific system. The result was a system of physics that seemed so rational and convincing that it lasted almost two thousand years. But it was wrong in almost every respect. Freudian psychoanalysts and Hippocratic physicians were in the same boat. They had elegant and reasonable systems of thought with which they could explain pretty much any observation. The pathologies of their patients could always be interpreted within the bounds of their theories. And yet the their theories were completely untrue.

It may seem rather crude to compare macroeconomics to such discredited systems of scientific thought. But the problem is not confined to economics. Any subject dominated by a lack of solid data and beholden to theory will face the same issue. Within modern science, string theory is well up this particular creek. Arguably, climate science is as well. The failure of computer models to predict the climate has increased the importance of theory and hardened the political allegiance of those engaged in debates on global warming.

What is the answer? For macroeconomics, there probably isn’t one. The economy is too complicated to predict, even if we understood exactly how it works, which we don’t. So it is best to understand economic debates as proxies for political arguments. The good thing about that is we can all get involved. Macroeconomics boils down to informed opinion and when it comes to opinions, we all have one.

The Panama Papers aftermath: it’s time to abolish the withholding tax.

Originally published on Conservative Home.

When the Panama Papers were splashed back in April 2016 with breathless excitement by the Guardian and the BBC, it looked as though we might get to enjoy some juicy scandals. But now, after a few months of gestation, the leaked documents are, from a UK point of view, a damp squib. Admittedly, the name of David Cameron’s father was unfairly dragged through the mud. However, it eventually dawned on people that neither he, nor his son, had done anything remotely untoward. Other than the Cameron non-story, the 11.5 million files in the Panama Papers don’t appear to tell us much about the tax affairs of UK residents.

In any case, when it comes to tax evasion, the Government has been on the case for some time. From June, all UK companies have to publicly register their owners, while an international treaty to share information on offshore bank accounts has been agreed by over 130 countries. A string of new offences is included in this year’s Finance Bill against enabling and engaging in offshore evasion. All this was in train well before the Panama Papers hit the newsstands. Admittedly, no one will be convicted for any of these new crimes. They are intended to ensure that financial institutions stop turning a blind eye to possible cases of tax evasion. The banks themselves will enforce the new rules through enhanced compliance procedures.

With all this activity, it is worth asking how serious the problem of evasion is. Wealthy British people do indeed have billions stashed offshore, and not all of them come clean with the taxman. But, perhaps surprisingly, the vast majority of them do. For example, when HM Revenue and Customs (HMRC) obtained account details from the notorious Geneva branch of HSBC in 2011, they found information on about 7,000 British-held accounts holding in the region of £13 billion. Yet, it turned out that over 80 per cent of these didn’t owe a penny extra in UK tax.

From those that did, HMRC recovered £135 million of back taxes, interest and penalties. A significant haul, to be sure, but only enough to pay our dues to the European Union for a few days. In only one case did HMRC and the Crown Prosecution Service adjudge that the evidence of criminality was sufficiently strong for a prosecution. No doubt, the Panama Papers will reveal some more tax evaders, although the scale of wrongdoing is likely to be more modest than the trillion pounds suggested by Labour MP Dan Jarvis in the New Statesman. Nonetheless, we must be close to the point at which the myriad of new regulations and offences introduced by the former Chancellor, George Osborne, end up costing innocent taxpayers more than the Exchequer recovers from the miscreants.

Turning to legal tax avoidance and planning, the Government is implementing a series of international agreements to restrict the tax deductions that companies can enjoy for cross-border financing and has introduced a general anti-abuse rule. Perhaps more importantly, the courts have stopped finding that tax avoidance schemes work, even when the scheme follows the letter of the law.

In this new era of transparency, the Government should now start to dismantle the tax barriers that distort international commerce. Just as Nigel Lawson removed exchange controls, Philip Hammond should abolish the nineteenth-century throwback called withholding tax. This is a tax that countries levy on money paid abroad. For example, the UK charges a tax of 20 per cent on payments of interest to many non-resident recipients even though the recipients will also pay tax on the money in their own country. That’s double taxation and completely unfair.

Unfortunately, sorting this double taxation out gives rise to all sorts of administrative problems. So, if you want to set up a fund that caters for international clients, you can’t do it in the UK because of the withholding tax. That’s why Ian Cameron set up his trust abroad and why so many European funds, holding €3.5 trillion in 2015, are actually situated in Luxembourg, which doesn’t withhold tax. The vast majority of money held in countries like Switzerland, Luxembourg and elsewhere is kept there specifically so that it is taxed once, but no more often than that. Abolishing withholding tax would see some of that money returning in the UK. And much of the business of law firms like the Panama Paper’s Mossack Fonseca would dry up.

Luddites and the internet

When I was young, Yellow Pages was ubiquitous. Businesses paid a modest fee to appear in the directory (or a less modest one if they wanted a bigger notice). The big yellow books of listings were delivered free to almost every household. The company brought together Balham’s plumbers with its inhabitants’ leaking taps; and summoned minicab drivers wheresoever they were needed at 2am on a Sunday morning. So Yellow Pages made a healthy profit by providing a valuable service. They also produced some outstanding television advertisements. No more. The internet has seen to that. Hibu, as the company is now called, is now effectively owned by its lenders and doesn’t publish directories anymore.

Has the internet destroyed the value in this once profitable company? It has certainly destroyed many viable businesses.  And not just Yellow Pages. It has done the same to bookshops and it is beginning to eat into other retailers as well. So where has the value gone? The answer is that it has moved to you and me. We find it more convenient to do things online. It frees up time and saves us money. But our extra free time isn’t immediately monetised and we might not spend the cash we save. Eventually, we’ll reassign our time and resources to more profitable activities, but that isn’t much comfort if you publish a telephone directory.

It was the same in the late eighteenth century. New machinery like the spinning Jenny and the mule meant that fewer workers were needed to produce the same amount of cotton fabric. People saw the machines as a threat to their livelihoods. And they were right. A few went so far as to try to hold back progress by force. My old friend Jenny Jones, a Green Party member of the House of Lords, described the luddites as fiery and reasonable. You can see her point, even if the Luddites turned out to be on the wrong side of history (although when household appliances made domestic service obsolete, no one seemed so worried).

Productivity is a good word. Businesses and governments strive for it. But basically, it means fewer people doing the same amount of work. An increase in productivity removes money from the pockets of workers and deposits it in the pockets of consumers (as well as companies’ coffers). The service sector used to be immune to this effect (which is why the number of jobs in the manufacturing sector always seems to be shrinking relative to the services sector). No one ever managed to automate salespeople or waiters. But the internet has begun to increase productivity (or destroy jobs, depending on your point of view) in the service sector as well. For instance, I’ve stopped using my firm’s helpline when I have an IT problem. Just logging into a chat room is so much easier while the worker at the other end can manage multiple queries at the same time.

But of course, this is only part of the story. Markets reassign resources, including workers, to where they are needed. We can enjoy our extra free time or work even harder if we want to. We can write blogs, play computer games and read to our children. The hole in GDP left by the loss of telephone directories is filled by App designers and delivery drivers. Companies invent things like iPads that we never knew we wanted or needed. Making things more efficient is ultimately good for all of us. Doing away with Yellow Pages increases the demand for other things. But we should not forget that, even though capitalism’s destruction is creative, the destruction is still real.

The cause of recessions

There’s been a lot of talk about whether or not Brexit will cause a recession. Most commentators seem to imagine that recessions can be avoided if we do the right think. The former British Prime Minister Gordon Brown even turned this delusion into a political slogan: “No more boom and bust”. Of course, particular recessions have particular proximate causes. The subprime crisis was the catalyst that kicked off the great recession of 2008 that we still have not quite got behind us. But that was not why it happened. After all, the sovereign defaults and the LTCM collapse in 1998 didn’t cause a recession. Nor did the dotcom crash of the early noughties. So you need to look a bit deeper to understand why recessions happen and why they cannot be avoided.

Here’s one theory (which I very much doubt has the merit of originality). I call it the theory of crud. Actually, I don’t. But the word I use instead of ‘crud’ isn’t appropriate for a family blog.

When economies are growing, we can get away with quite a lot. If you have an underperforming employee, then firing him or her is probably more trouble than it is worth if your business is still making lots of money. Innovation is risky and there is little point in it if you can make money doing what you’ve always done. This is human nature.

Economic growth will also resist measures that might be expected to stifle it. Government regulation and taxation, as well as high debt levels, are cases in point. A growing economy allows us to feel we can take on more debt than is prudent. It encourages governments to increase public spending so as to look after their clients and stay in power. So they raise taxes, removing money from productive uses in the private sector to unproductive ones in the public sector. Governments also get themselves into debt more than they can afford. Growing economies let them (and us) get away with mortgaging the future.

Over-regulation is even worse. It is essentially a form of taxation whereby money is moved from productive sources into the hands of compliance officers and inspectors who are often, but not always, in the public sector. But regulation is also less obvious that straightforward taxation and can be disguised as a good thing when it purports to improve health and safety, or the environment, or whatever. This makes getting rid of red tape an enormous challenge. When an economy is growing, no one can be bothered. Protectionist policies have similar advantages. Free trade is a hard sell.

And it gets worse. A growing economy lets people make colossal and stupid mistakes without being punished. Utterly insane ideas, like joining Europe’s disparate economies into a single currency, can appear to be working when the damage they do is hidden under economic growth.

Crud is what I call all this taxation, petty rules, overhanging credit and stupidity. It jams the works of the economy like sand in a machine, wearing down the gears and gradually making the whole mechanism less efficient. But when the wheels are turning, they can overcome this resistance. The crud continues to build up, week by week, but while the machine turns, it is worth nobody’s while to do the hard work of clearing it out. Things are obviously much less efficient than they should be, but they still work enough for people to pretend everything is fine.

But eventually, the crud has built up to such a level that it causes serious damage. Important works clog up. Gearwheels crack under the strain of turning through the rubbish around them. The machine judders to a halt. A recession begins. Exactly where and when this happens is essentially random. But a time comes when an economy is simply not functioning well enough to overcome a shock. Only then does the clear-up begin.

That’s what makes recessions so painful. All those decisions that were put off when times were good can no longer be avoided. The shirking employees have to go; the debt must be repaid. Idiocies like the Euro show their true colours. The engine of the economy has to be steam-cleaned at vast expense and discomfort. By the way, the recession we have just had was so deep and prolonged not because of wicked bankers. It was just that long boom from 1990 to 2008 gave us so many opportunities to accumulate crud. Getting things going again with so much junk in the system is extra-hard.

And there is an added danger. A recession can lead people to demand even more regulation and red tape in the ignorant belief that this prevents rather than causes economic reverses. Keynesians cry that we have to shovel even more crud into the system to restart it. Roosevelt’s famous New Deal is now known to have made the depression of the 1930s even worse than it needed to be. And here’s why: the New Deal just showered crud over everyone. Sadly, the only way to get the economy moving again is paying down the debt, tearing up the regulations, slimming down the workforce and keeping markets open for business.

So, in summary, we get recessions because capitalism works. Capitalism generates economic growth. When things are good, human beings have a natural tendency to avert their eyes from future problems. But eventually we just have to roll up our sleeves up and carry out the necessary spring cleaning.

Will Brexit cause a recession? It might turn out to be a catalyst but it won’t be the cause.

Brexit: What on Earth Happened?

People around the world may have heard some surprising tidings from the United Kingdom over the last few weeks. As some international news reporting has painted events here as either a revolt by xenophobic peasants or just complete chaos, I thought it was worth setting down what has really happened and the reasons behind it.

First, some history: back in 1975, the British overwhelmingly endorsed their membership of the European Economic Community or EEC, the predecessor organisation of the European Union (EU). On balance, the British decided that membership of a huge market on their doorstep was worth sacrificing some of their self-rule for. Besides, back in the 1970s, the UK was in a bad way, with widespread labour disputes, high inflation and shaky Government finances.

In 1992, the EEC was turned into the EU by the Maastricht Treaty, which was intended to be the first step towards a federal United States of Europe. The British Prime Minister at the time, John Major, declined to obtain a democratic mandate for this. The previous Prime Minister, Margaret Thatcher, had been deposed a couple of years before when she had effectively threatened to veto the plans for a federal Europe. In the same year, on 16 September 1992, ‘black Wednesday’, the German central bank provoked the markets to devalue the British pound against the will of the British Government, causing it to fall out of the exchange rate mechanism. The combination of Maastricht and black Wednesday turned the majority of the Conservative Party against the EU. These events also destroyed the credibility of Mr Major and his Government, which lost the 1997 election by a landslide.

From 1997 to 2010, Tony Blair’s Labour Party was in government and was determined that the UK would play a full part in the EU. In 2005, in an effort to increase the democratic legitimacy of the EU, a series of countries held referendums on its new constitutional treaty, which was a further step towards a federal Europe. However, when the EU lost the votes in France and the Netherlands, the results were ignored and the constitutional treaty was pushed through anyway with a different name. Both Mr Blair and the new Conservative leader, David Cameron, also promised a referendum on the constitutional treaty but both reneged when it became politically inconvenient to give the people a say. The grand plan to provide the EU with democratic legitimacy ended up destroying its credibility because the people declined to give the answer they were required to.

In 2013, now in government, Mr Cameron again promised a referendum. He said he would renegotiate the UK’s relationship with the EU before the referendum and then ask the people if they wanted to Leave or Remain, based on the new terms. He hinted that, if the negotiation didn’t go his way, he might campaign to Leave. But when his negotiations duly failed to achieve anything of substance in February 2016, he announced he would, after all, campaign to Remain. His credibility as honest broker was instantly destroyed and British voters stopped listening to a word he said. They also got sick of every international bigwig, from President Obama downwards, telling the UK was doomed if it voted to Leave.

On 23 June, we voted 17 million to 15 million to Leave the EU. Everything about the vote was a surprise. No one thought Leave would win. Even after the polls closed, the betting markets implied a 90% chance of a Remain vote. Turnout was 73%, the highest in a national vote for 25 years. In short, more of the British voted to Leave the EU than have ever voted for anything else in our history.

So what happened and what happens next? The Leave vote was a coalition of three disparate groups. The campaign was led by a relatively small group of internationalist libertarians, including Boris Johnson, Michael Gove and Daniel Hannan. They saw the EU as an anti-democratic and corporatist racket that was immune to reform, as the failure of Mr Cameron’s renegotiation had shown. The shock troops for Leave were supporters of Nigel Farage and the UK Independence Party: mainly paleo-conservatives who objected to uncontrolled immigration (the UK must accept unlimited numbers of immigrants from the EU).

The third element of the coalition for Leave was one whose participation nobody could predict in advance. This final group consisted of working class people who nominally supported the Labour Party, but in practice rarely voted at all. Sick and tired of being ignored, and not seeing the benefits of globalisation, they came out to vote on 23 June and delivered the verdict of Brexit.

Now the UK embarks on an exciting journey. We want to continue to trade freely with the EU, but also sign free trade deals with the rest of the world as fast as we can. We’ll still welcome many new immigrants to the UK, but they won’t all have an automatic right to reside here. And the democratic control of farm subsidies, fisheries and taxation (the UK currently can’t even abolish the tax on sanitary towels) will return to Westminster. Of course, plenty of people have valid concerns about the effects of Brexit. And it is to be expected that many individuals will have invested in the status quo of EU membership, especially if the status quo has lasted for over 40 years. That does not make it a good thing. Indeed, institutional inertia and the fear of short-term consequences over long-term benefits are among the most damaging of political motivations.

As for the rest of the EU, it needs to reform quickly to gain democratic legitimacy while also, somehow, undoing the immense damage done by the single currency. Is that possible? Either way, we British wish the EU well. With Brexit, we cease to be a truculent tenant and become a friendly neighbour.